UNDERSTANDING SAS’ POSITION IN THE NETWORK THROUGH EVALUATING ITS
RESOURCES AND IDENTIFYING THEIR OPPORTUNITIES AND CHALLENGES
Supervisor:
Authors:
Arnim Decker
Ayshe Gyunaeva Kodzhaibryamova
Teodora Valkova
Mirela Matic
Ieva Aliulytė
Narcisa Tiliban
Date:
Number of words:
8 – 01 -2014
21 …
ABSTRACT
The research paper consists of Scandinavian Airlines System (SAS) case study, its network
overview by analyzing how SAS can compete and collaborate with others in the existing network –
Star Alliance as well as the resource based view (RBS) which helps to evaluate company’s own
recourses. The goal of the project is focused on three research questions which are related to SAS’
recourses and influence it creates for the position in the network, advantages and disadvantages of
being a member of the alliance and the opportunities and challenges SAS’ recourses create.
The first and most important step is to build up the methodological platform of the research
paper where authors are describing why the qualitative research approach with the case study method
has been chosen. The qualitative research consists of the analysis of primary data – annual reports, as
well as secondary data: papers, articles, web-pages and various researches about airline industry
accomplished by airline analysts.
The second step is a theoretical platform which is based on the literature review on the interorganizational network approach from the year 1987 until 2013 followed by different authors which is
presented in a chronological way and resource based view theory (RBV) based on Jay Barney and
Delwyn Clark’s book “Resource-based theory”.
Based on the information acquired from the literature review, the further part of the project is an
analytical framework where the SAS’ current position in Scandinavian market in terms of networks
and resources is described. Authors are discussing the importance of airlines regulators – IATA and
ICAO and consequence of being a member of alliance. Also, it includes the SAS’ internal environment
– comparison between its own resources with the ones Lufthansa, Swiss and Turkish Airlines’ possess.
After that, the SAS’ position in the market, using the VRIO framework is adapted in order to find out if
described and analyzed resources can still offer a competitive advantage and help the company to
overcome its financial decrease from the last 4 to 5 years. Moreover, the relationship (competition or
collaboration) between SAS and few Star Alliance members such as Lufthansa, Singapore Airlines and
Turkish Airlines is explained by using Hakansson and Ford’s three aspects of networking formed on
three paradoxes mentioned in the literature review.
Finally, the last chapter is a summary of SAS’ risk, challenges and opportunities. The risks SAS
facing are mainly related with fast-growing airlines worldwide, especially low-cost carriers. The
challenges of SAS can be noted as company’s unit costs in a comparison with a strong low-cost carrier
competitor Norwegian Airline Shuttle and low-cost airlines’ strong position in the airline industry
nowadays as well as geographical location, ownership structure of three different countries and the
2
fleet structure – different types and number of airplanes SAS possess. The opportunities are described
as a purchase of new airplanes which would lower the maintenance and fuel costs, as well as IT
improvement and bringing more international routes into the market.
3
TABLE OF CONTENT
LIST OF ABREVIATIONS .............................................................................................................. 5
CHAPTER 1 - Introduction and problem formulation ........................................................................ 6
1.1 Introduction ............................................................................................................................... 6
1.2 Problem area ............................................................................................................................... 7
CHAPTER 2 - Methodology ............................................................................................................... 8
2.1 The case study as a research method ......................................................................................... 8
2.2 Research design ........................................................................................................................ 10
2.3 Collecting case study data ........................................................................................................ 14
2.4 Analyzing case study evidence and reporting of findings ........................................................ 15
2.5 Limitations of case study.......................................................................................................... 16
CHAPTER 3 - Literature review of Network Theory and theoretical platform ................................ 17
3.1 Literature review ..................................................................................................................... 17
3.2 Theoretical platform ................................................................................................................. 28
3.3 Analytical platform .................................................................................................................. 32
CHAPTER 4 - Analyzing SAS' position in Scandinavian market in terms of networks and resources
............................................................................................................................................................ 33
4.1 Main airline industry regulators ............................................................................................... 33
4.2 The analysis of SAS’ internal environment – a comparison of its resources with those of
Lufthansa, Swiss and Turkish Airlines .......................................... Error! Bookmark not defined.
4.3 The analysis of SAS' external environment – a comparison of its networks with those of
Lufthansa, Swiss and Turkish Airlines .......................................................................................... 54
CHAPTER 5 - Identification of SAS' challenges, risks and opportunities ........................................ 60
5.1 Introducing with SAS' risks .................................................................................................... 60
5.2 Introducing with SAS' challenges ............................................................................................ 62
5.3 Introducing with SAS' opportunities ........................................................................................ 66
CONCLUSIONS................................................................................................................................ 68
BIBLIOGRAPHY .............................................................................................................................. 69
4
LIST OF ABBREVIATIONS
ASK:
Available Seat Kilometer
BA:
British Airlines
CAPA:
Center for Aviation
CEO:
Chief Executive Officer
IATA:
International Air Transport Association
ICAO:
International Civil Aviation Organization
IMP:
Industrial Marketing and Purchasing Group
LCC:
Low Cost Carrier
NAS:
Norwegian Airline Shuttle
NKR:
Norwegian Kroner
RBV:
Recourse Based View Theory
SAS:
Scandinavian Airline System
SIA:
Singapore Airlines
SKR:
Swedish Kroner
VRIO:
Value, Rarity, Imitability and Organization
5
CHAPTER 1 - INTRODUCTION AND PROBLEM FORMULATION
1.1 Introduction
The airline industry has experienced significant changes in terms of regulating the international
flight routes over the past 10 years. The strong pressure has been felt for existing airline network (such
as Star Alliance, Sky Team, One World) companies as an aggressive increase of new airlines and
especially low cost carriers (LCC). However, the mentioned network companies keep growing but in
much slower pace (SAS Annual report, 2012). Also, according to A. Cento, the sector of European
airline industry has experienced a radical change both on the supply and demand sides. Different than
in other industries worldwide, the driving forces controlling the current changes in the airline industry
do not depend only on technological factors, but mainly on expansion in the cultural, institutional and
legal areas. “Legal and institutional aspects have clearly affected the structure of the market, while
cultural forces have influenced dimensional mobility and its characteristics“(Cento, 2009). The airline
industry is also very competitive and often characterized as having high fixed costs and low profit
margins.
However, as it was published in “Economist”, “the much-maligned airline industry is in the
middle of a resurgence-according to the airline industry itself. The International Air Transport
Association (IATA), the trade group for the world's biggest airlines, said this month that it expects
industry profits to hit a record $19.7 billion in 2014, an increase of more than 50% on the $12.9 billion
estimate made for 2013” – (www.economist.com). It can be interpreted that airline companies certainly
have a potential in growing as the air transportation demand is getting higher each year.
Moreover, the low-cost carriers (LCC) have been aggressively expanding its operations and
bringing new routes not only within a continent but also overseas. A good example could be
Norwegian Airline Shuttle (NAS) which is privately owned company and has recently launched new
flight destinations in Europe as well as United Arab Emirates, United States of America, Thailand,
Morocco. Also, as from “Economist”, “in order to escape high Nordic labor costs and taxes, NAS is
increasingly basing planes and hiring people elsewhere: in Spanish resorts and at London’s Gatwick
airport. Its back office is in Latvia; its IT department is in Ukraine“. Also, “From the Vikings to Roald
Amundsen, Norwegians have always been up for a foreign adventure. But nowadays their country runs
along consensual Scandinavian lines, with high costs and taxes and strong unions and labor laws
(www.economist.com). As NAS is a low-cost airline, the price is the strongest factor outrivaling non
low-cost airlines such as Scandinavian airlines (SAS) and creating high competition which might
influence its performance.
6
The main focus of the project – Scandinavian Airline System (SAS) is operating since 1946 “as
a consortium of the national airlines of Sweden, Denmark and Norway”. Its five top destinations in the
Scandinavian region are: Stockholm, Copenhagen, Oslo, Bergen and Gothenburg. SAS started its
internationalization in 1997 when joining Star Alliance network together with Lufthansa, Air Canada,
United Airlines and Thai Airways International. SAS has been quite successful airlines over the years,
“establishing innovate and pioneering airline”. SAS has introduced Tourist Class in 1952 which was
first “discounted ticket with certain conditions” worldwide. It was the also first airline launched flights
to the North Pole in 1960 (www.staralliance.com).
1.2 Problem area
Although SAS is described as the most punctual airlines and possessed the highest level of
customer satisfaction and customer loyalty in the past few years (SAS Annual Report, 2012), the main
problem SAS has been facing currently is significant and constant downturn in sales for the past 4-5
years. As Richard Gustafson (President and CEO of SAS) has stated in the company’s annual report
“Nevertheless, the results are far from satisfactory and it has become increasingly clear that major
structural changes are necessary to create a functional and sustainable business model”. There are
several factors which prove it. First of all, Scandinavian airlines are recognized as having one of the
highest unit costs (cost per available seat kilometer) in Europe. SAS’ unit cost is SKR 0.86 and on the
other side Norwegian airline’s, their biggest competitor, unit cost is much lower - NKR 0.45.
Moreover, the average age of SAS fleet is 10.5 years while NAS only five years (www.avitrader.com).
In addition, the Center of Aviation, which is the world’s leading organization for aviation news
(CAPA), concluded that the diversity and the age of SAS’ airplaines are one of the reasons for their
high costs (CAPA, 2013). One more interesting fact is that Scandinavian airlines have the highest
employee costs compared to any other European airlines (CAPA, 2013). Hence, it was also published
on BBC news on 19th November 2012, that in order to avoid the bankruptcy SAS aimed to cut 6,000
job positions, as well as cutting salaries up to 17% (www.bbc.co.uk).
As a consequence, the 4Excellence Strategy has been implemented which “will deliver lower
and more flexible costs and divestments will provide adequate financial stability and recourses to
continue strengthening Group’s customer offering”. In other words, the strategy aims (by the end of the
year 2015) to compete with aggressive low-cost carriers as the first network airline in Europe, maintain
the high position in business travel market and strengthen its position within the leisure travel market
(SAS Annual Report, 2012). The main question arising here is whether the SAS’ presence in an
existing network – Star Alliance and its own unique recourses creates particular challenges and
opportunities and how.
7
Hence, the Star Alliance and the connections within SAS and few other chosen member
airlines, SAS’ own recourses, main global associations – regulators IATA and ICAO, may have the
high importance and extremely strong influence for SAS business success.
After all, there are three main questions developed which are going to be answered within the
research paper in order to understand better SAS’ opportunities and challenges which are as follows:

How do SAS’ resources influence their position in the network?

How does membership in alliance create advantages and disadvantages for SAS?

How do resources create opportunities and challenges for SAS?
8
CHAPTER 2 – METHODOLOGY
In methodology part we will be focused on defining case study as a research method,
determining conditions, as well as strengths and limitations authors are aware. In addition, research
design of project will be presented, consisting of different components: preparing, collecting of data
and analyzing; all will be evaluated by using appropriate analytic technique. Subsequently, authors will
facilitate for reader to understand link between problem formulation and chosen methodology
approach, through understanding the way of collecting and analyzing data.
2.1 The case study as a research method
There are different ways of doing social science research: experiment, survey, archival analysis,
history and case study. Each of them possesses certain advantages or disadvantages, as well as
strengths and limitations. It depends by nature of problem in focus, and circumstances in which
problem exists. In this paper authors will use case study method as the most appropriate approach for
this qualitative research, and for understanding a real-life phenomenon in depth. Qualitative research
will be conducted by using primary data, annual reports, as well as secondary data: papers, articles,
web-pages and various studies about airline industry accomplished by airline analysts.
The case study research represents method as an empirical inquiry that investigates a
contemporary phenomenon within its real-life context; when the boundaries between phenomenon and
context are not clearly evident; and in which multiple sources of evidence are used (Case Study
Research, Yin; 1984 p. 23). As a method, it is suitable for studying complex social phenomena. Case
study research is consisted from six distinct processes and these are: planning, designing, preparing,
collecting, analyzing, and sharing. (Ibid p. 2)
Every named phase in case study research has well determined order in its executing that
provides accomplishing of each phase in order to design clear and correct case.
Reasons for choosing this method are three distinguish conditions that determining research
path. Usually, case studies are most common method in following situations:
 “How and why” questions are object of investigating regarding to the main problem
 Very often investigator does not possess any degree of control over situation
 At the focus is currently phenomenon within a real-life context. (Case Study Research; 2009,
Yin p. 2)
There are significant contrasts between case study and other methods of research. Having in
focus questions “how and why” is one of them. In comparing with experiments when investigator can
manipulate behavior, in case study there is no control over situation from researcher. The nucleus is
9
complex social phenomenon in a currently real-life context. Another essential attribute of case study is
relying on multiple sources of evidence.
In the following chapters, authors will have in focus contemporary events in Scandinavian
Airline System, by answering the certain questions and without any control over situation.
Table 1 - Relevant situations for different research methods
1.Form of research 2. Requires control of 3.
Focuses
on
question
behavioral events?
contemporary events?
How, why?
yes
yes
Who, what, where,
Survey
how many?
no
yes
Who, what, where,
Archival analysis how much?
no
yes/no
History
How, why?
no
no
Case study
How, why?
no
yes
Source: (Ibid)
METHOD
Experiment
Importance of case study method is in effort to clarify one or more decisions, in order to explain
why they were taken, how they were implemented and with what result. (Yin, 2009, p. 17). The
objective of this paper is to provide understanding of SAS’ position in Star Alliance group through
analyzing company’s resources and describing their opportunities and challenges. Emphasizing
questions are “how and why”. These questions have explaining nature and they are the most
appropriate for the case study research. In this type of research they are govern toward explaining
current situation by analyzing how and why behavioral events.
2.2 Research design
According to the structure of case study method applicable in this paper, the next important
phase in evaluating of the successful research is design. Research design is a plan of research
investigation, but at the same time, it is more than that. It represents the path from beginning to final
spot in the sphere of researching. There is numerous problems research design dealing with, such as:
 What question to study?
 What data to collect?
 How to analyze the results? ( Ibid p 26)
As it is already defined, research design constitute logical plan consisted from different steps.
Among them, five components are essential:
- study questions
- study propositions
10
- units of analysis
- links between data and propositions, and
- criteria for interpreting the results (Ibid, p 27).
Defining study questions presents fundamental step in a research process. Other steps are
significant as well; indicating in a field of study over propositions, or pointing on the case problem
through the units of analysis. Last two components are equally important and they are demonstrating
data analysis phases in case study research.
Figure 1 - Research design components
Study questions
How do SAS'
resources
influence their
position in the
network?
How does
membership in
alliance create
advantages and
disadvantages for
SAS?
Study
propositions
Benefits of
being part of
network in
airline industry
SAS
performance
improvement in
alliances
Units of
analysis
Scandinavian
Airline System
Link between
data &
propositions
Explanation
building
technique
Criteria for
interpreting a
study's findings
Linearanalytic
structure
Most awarded
members of
Star Alliance
serving
Scandinavian
market
Regulators of
ariline industry
How do resources
create
opportunities and
challenges for
SAS?
Source: Authors
Based on appointed relevant facts and components, research design for this particular project is
established. It comprised identification of problem to be investigated as well as previous completed
literature review. As a result, deeply study questions are identified regarding SAS opportunities as a
member in a network, their challenges rise by their resources and importance of being part in one of
existing alliances. Through highlighting areas of interest and identifying study propositions scope of
investigation is widen. Moreover, after clarifying study questions and propositions, units of analysis are
specified. In this defined case units of analysis are SAS, regulators of airline industry and the most
awarded members of Star Alliance that serve Scandinavian market.
11
In order to make a link between data and propositions, explanation building technique has been
used. It represents analytic technique by building explanation about the case (Ibid, p. 141). More
information about this technique will be provided in further chapters. Based on study propositions the
case is largely explained from theoretical perspective. For interpreting of findings linear-analytic
structure is the most adequate. It constitutes approach for developing of research report. The case study
where this structure is applicable starts with literature review, collecting and analyzing of data and the
conclusions based on findings. Since research design represents a path from beginning to final step, in
this specified case can be shown as follows:
Figure 2 - Case study design
Introduction and problem formulation
Methodology
Literature review
( Network theory and Resource-Based View)
Analyzing SAS postion in Scandinavian market by
using their resources and networks
Identification of SAS risks, challenges and
opportunities
Conclusion
Source: Authors
12
Theory development in research design
Developing of theoretical framework for the case study has an essential role. Identifying theory
or group of theories for particular case study has to be accomplished before even thinking about data
collection. According to Yin (Ibid, p. 57) there are different types of illustrative theories that can be
used:
 Individual theories (theories of individual development; individual is in focus)
 Group theories (interpersonal networks)
 Organizational theories (organizational structure and functions; inter-organizational
partnerships)
 Societal theories (international and cultural behavioral and development).
In this project authors will discuss organizational theories, since the focus are airline companies
and airline industry from network theory aspect. Subsequently, having in focus SAS’ membership in
alliance, means that company will be observed as a node in network system. If SAS is observed in a
real-life context, as definition of case study method recommends, then it is consisted from internal
resources and external environment. To overcome threats or to exploit the opportunities from external
environment company has to focus on its own strengths and try to improve weaknesses. Again, to
overcome a lack of resources that possess, has to embedded in a strong and developed alliances. In
other words, the focal company has to establish threads with similar companies and overcome different
barriers in performing activities.
In order to identify the opportunities and challenges that SAS faces, the authors of this project
have decided to emphasize two theoretical approaches – the Network theory and the Resource-based
view (RBV). The choice of the Network theory as a theoretical platform, on which this paper is going
to be based on, is pre-determined by its own nature that is the topic of this paper. As the project is
going to build up on the advantages and disadvantages that SAS viewed in terms of its membership in
an alliance, it is essential that the Network theory is involved. The decision for a network perspective is
essential also due to the nature of the airline industry which relies on networks in order to create value.
The (strategic) alliances and different types of partnerships are not unknown concepts for the firms in
this industry. These concepts are not new also for SAS, which is already a member of a strategic
alliance.
However, the question why the Inter-organizational network theory but not Social Network
theory is elected, needs to be discussed for a better understanding of this paper. This choice is
determined by the nature of SAS, being the largest airline company in Scandinavia – the flag carrier of
13
all the three Scandinavian countries with a history of more than 65 years. The size and the historical
background of the company leads to the conclusion that it is difficult to try to view SAS as a part of a
social network, where the individuals are the main focus. Therefore, the main actors in this paper will
be viewed as institutions with their resources and formal relationships that they have developed or
would like to develop. Thus, applying the Inter-organizational network theory, further referred only as
network theory (for simplicity), will be the theoretical platform of the problem investigated in this
paper.
As to the use of the Resource-based view in this work, the authors would like to highlight the
importance of the resources within the organization which also influence the performance of a
company. While the Network theory can describe better the external environment, the Resource-based
view is used as a tool for analyzing the internal one. According to Arya & Lin (2007), this theory states
that resources capable of producing competitive advantage can expand both: firm’s borders and inter –
firm relationships. Therefore, a competitive advantage can be created not only by the company’s
internal resources, but also by the external resources that arise from relational networks.
2.3 Collecting case study data
After defining questions to be researched and designing sequence, the next natural step is
collecting the data necessary for completing the task. Generally, there are six sources of evidence:
direct and participant observation, physical artifacts, archival records, documentation and interviews
(Ibid p. 99). For a good case study, using just one of the sources usually is not enough. The goal of the
reliable and trustworthy case study is using as much as possible different compatible sources.
Direct observation is divided on two types of activities: formal and casual. Formal is related
with nature of behavior and can be used for business meetings, workshops and more formal occasions.
Casual observation is wider technique implementing in those circumstances when more data is
collecting by non-formal observing, such as field work. Participant observation is slightly different
because permits for observer to partly participate within the behold project. The most used source of
evidence in case study issues is documentation.
Moreover, there are certain benefits in using this type of sources: documents can be used more
times, it contains references, details, and it can be helpful in identifying new questions about the topic
to be discussed. Another relevant source of evidence is archival records. This source include:
organizational records, statistical data, and public use files. For creating this research paper case study,
two types of evidence will be used in order to provide trustworthy case: documentation and archival
records.
14
Subsequently, authors will use archival records by using primary data (annual report) and
documentation by using secondary data (articles, papers, previous analysis). Each of mentioned sources
contains strengths and weaknesses. From the following figure it is possible to see that documentation
has more strength comparing to other sources and confirming it wide appliance.
Table 2 - Six sources of evidence: Strengths and weaknesses
Source of evidence
Documentation
Strengths
-Can be reviewed repeatedly
-contains exact names, references,
and details
-broad coverage
-same strengths as documentation
-usually very precise
Weaknesses
-can be difficult to find
-biased selectivity
-access can be limited
-same weaknesses as
Archival records
documentation
-accessibility
-bias as a result of bad articulated
questions
Interviews
-focus directly on case study topic -interviewee gives want he/she
wants to hear
-cost
Direct
-reality contextual
-time-consuming
observations
-selectivity
Participant
-bias due to participant-observer’s
observation
-insightful
into
interpersonal manipulation of events
behavior
-selectivity
Physical artifacts
-insightful
-availability
Source: (Ibid, p. 102)
To improve impact of named sources certain principles needs to be followed. Firstly, using the
multiple source of evidence allowed researcher to investigate a wider scope of issues. Secondly, in
order to increase reliability of case study, investigators must create appropriate case study database,
with the documents and materials relevant for investigating process. Finally, for easier understanding
of data and reports used in research, chain of evidence has to be conducted. In other words, genesis of
research has to be understandable through each phase of case study.
2.4 Analyzing case study evidence and reporting of findings
After identifying a problem for case study research, establishing research design and collecting
data from reliable sources, following phase is analyzing. Analyzing represents complex process and
contents broad approaches. Therefore, for avoiding the difficulties in a case study method, initial step is
choosing adequate analytic strategy which led to selecting suitable analytic technique. There are four
basic analytic strategies (Ibid, p. 130)
15
 Relying on theoretical propositions (the central idea is that researchers constantly compare
theory and data, iterating toward a theory which closely fits the data)
 Developing a case description (based on developing of descriptive framework for organizing
the case study)
 Using qualitative and quantitative data (includes both, qualitative and quantitative data;
imply using statistical techniques)
 Examining rival explanations (includes three previous and rival hypotheses based on
contrasting perspectives).
The authors of the paper recognized “relying on theoretical propositions” as the most
appropriate strategy in conducting case study research. This choice is based on the facts that case study
is originated on propositions which are results of literature review. Theory-guided analysis also offers
the chance to compare and complement the primary data collected within the research project with
secondary data, which is completed.
Since it is already underlined in research design, explanation building technique is stipulated as
analytic techniques useful in the case study. This technique is established by building an explanation
about the case (Ibid, p. 141). At the same time details in the case are comparing, and building an
explanation how something happened - how can SAS collaborate and compete with others in the
network? Moreover, this technique is based on theoretically significant propositions.
For representing the findings and concluding the case study, linear-analytic structure was used,
among other illustrative structures for case study compositions. It represents very common approach
for assembling the conclusions. As it was emphasized earlier, it begins with identifying the topic for
research and literature reviewing. Afterwards, it is explaining methods for collecting data, their
analysis and certain conclusions about the findings.
2.5 Limitations of case study
As it is explained at the beginning of the paper, there are certain limitations about case study
method. These limitations can be categorized as three main arguments. Firstly, there is concern
regarding a lack of systematic handling of data. In other words, there is assumption that case study
investigators are not following systematic procedures, and very often results and findings are
influenced by less relevant evidences (Ibid, p. 14). Secondly, there is accent on the fact that case study
method does not provide enough foundation for concluding from the scientific aspect. Subsequently, it
means that the case study as a qualitative method is not reliable for generalizing about the certain
problem, even if it is based on theoretical propositions related with the phenomenon in a real-life
16
context, and without any degree of control over the situation. Moreover, it means that other methods
are not reliable as well, excluding quantitative, because their results reflecting numbers. And the last
comment is that case studies are often too long, involving confusing data and irrelevant documents.
Hence, the procedure about accomplishing the case study research is brightly assigned and following of
the specified steps has a goal to ensure providing without irrelevant describing and facts. As it is
reported earlier, there are limitations regarding the project authors are aware. First of them is time
limitation. There is always a lack of time in accomplishing a project which requires evaluation in-depth
detailed information. Secondly, the project is based on annual report as the only source of primary data
and numerous of secondary data. Subsequently, it means that a survey, as well as interview has not
been conducted. Moreover, using the secondary data can be identified as subjective, since all references
are already interpreted by other writers and analysts and that can have a certain impact on project.
Thirdly, there is a limited approach to information. For instance, the project is based on named
data without any other information received from the observed company or industry. There are certain
future plans and changes, relevant for the project but without possibility to be explained by responsible
staff in the company.
17
CHAPTER 3 - LITERATURE REVIEW OF NETWORK THEORY AND THEORETICAL
PLATFORM
3.1 Literature review
This section reviews the extant literature on (inter-organizational) network approach from 1987
till 2013. Through the choice of articles, the authors’ intention was to restrict, as far as possible,
potential sample-selection bias. In making this selection, the authors therefore tried to access as wide a
range of sources as possible, in order to include contributions from different authors in interorganizational network field of work.
Firstly, an overview of articles by different authors is presented on a chronological way.
Secondly, the authors emphasize on one approach and build the theoretical foundation of this paper.
And finally, this sections presents formulated four propositions which are going to be disputed further
in the other sections of this work.
The reasons for the choice of the theories that are going to be discussed below are explained
previously in the methodology chapter. It is obvious that not all of the studies on inter-organizational
relations and networks could be covered in this paper and thus it does not include some pertinent
studies. The authors acknowledge the limitations that might occur because of this fact.
1989, Hakansson and Snehota, “No business is an island”
The authors of this article review the network model of the organization-environment interface
and discuss three central issues of the strategy management doctrine from the viewpoint of the network
model: (1) organizational boundaries, (2) determinants of organizational effectiveness, and (3) the
process of managing business strategy.
Network model of organization-environment interface
Hakansson and Snehota define the propositions of the network model as follows:
1. Business organizations often operate in a context where their behavior is determined by a
limited number of counterparts, which are all unique and engaged in pursuing their own goals.
2. An organization engages in continuous interaction with these counterparts, and these
relationships make it possible to access and exploit the resources of other parties and to link the parties’
activities together.
3. The distinctive capabilities of an organization are developed through its interactions in the
network, and thus the identity of the organization is created through its relations with the others firms.
18
4. Since the other firms in the network also operate under similar conditions, an organization’s
performance is determined by the whole network as a context, and even by interdependencies among
third firms.
Organizational boundaries
The authors state that when the perspective of management is adopted, the boundary as a
concept is related to those resources and activities that can be controlled and influenced by the
organization, and leaves outside those that cannot be influenced. On the other hand, they point out that
there is another aspect of boundary setting – the interrelatedness that prevails in networks and the
possible impact on the focal organization of relationships among third parties. The second approach
leads to the conclusion that some of the resources and activities traditionally considered “internal” can
hardly be controlled and influenced by the organization, while a number of what have been considered
“external” resources and activities do actually constitute an integral part of the organization itself and
are subject to its influence and control.
According to Hakansson and Snehota, the purpose of setting the boundaries of an organization
in the business strategy management doctrine is to focus on the variables which determine the
effectiveness of the organization and which are also subject to the influence of the organization. In this
management perspective it is essential to make the distinction between controllable and noncontrollable variables that determine the performance of a firm. While defining the determinants of the
organization’s performance, Hakansson and Snehota, highlight the need the context of the organization
to be included in this process.
Organizational effectiveness
Hakansson and Snehota argue that the effectiveness of the business organization is conditioned
by its “bargaining position”. An organization’s bargaining position is defined as “the ability of the
organization to exploit its environment in the acquisition of scarce and valuable resources” (Yuchtman
and Seashore, 1967). Therefore, the effectiveness of a business organization is explained by its capacity
to acquire resources through exchange with other firms in its network.
Two concepts that appear in the network model - “network position” and “strategic identity”
(Johanson and Mattsson, 1985; Hakansson and Johanson, 1988), according to the authors, could be
useful in exploring the issue of the bargaining position and the effectiveness of the organization.
The “microposition” (Johanson and Mattsson, 1985) is the bargaining position of the
organization in relation to one specific counterpart. It depends on the efficiency of the resource
deployment of the organization, as well as on the effectiveness of the organization in relation to other
19
firms in the network. The macroposition, on the other hand, reflects the role of the organization in its
own network. It also depends on the capacity of the organization to create a link with resources and
activities among the companies within the network. Therefore, it can be explained partly by what is
done within the organization itself, and partly by what the organization does in relationships with
others.
According to Hakansson and Snehota the network position is a relative concept. This means
that no two firms’ positions are alike and therefore, the network position means different things to
different firms related to the focal organization. The authors of the article also argue that the
performance of an organization in a relationship is perceived and evaluated by another party on the
basis of previous experience and present expectations. That is why the concept of “strategic identity”
(Hakansson and Johanson, 1988) is included in the network model.
Thus, the authors explain the effectiveness of the organization as given, not by the
organization’s “adapting” to the environment but by its “relating” to the context. While “adapting”
necessarily leads to a focus on the internal processes of the organization, “relating” arouses a shift in
focus to its context. Therefore, the authors identify the determinants of the bargaining position and of
the overall effectiveness of the organization to be the activities taking place between the organization
and the other firms, rather than activities within the organization itself.
Managing the effectiveness of an organization
According to authors, the traditional view of management of the organizational effectiveness
implies that the decisions are taken after scanning some factors, and then a plan of action is formulated
and implemented. These factors are environmental conditions, changes and opportunities.
However, Hakansson and Snehota state that the network model generates another approach to
the question of effectiveness management in organizations. As the authors mention in their work,
relating to the context is the central issue of the strategy. The context itself is conceived not as given
beforehand or predetermined but as enacted and therefore cannot be assessed. Strategic identity, which
is the basis of effectiveness, is achieved by the interaction behavior of individuals in relationships.
Thus the effectiveness of an organization - its strategy - is based on interactive behavior.
1995, “Governance Factors in a Network Process Approach “, Mario Benassi
In his work Benassi states that most of the approaches explaining networks are static, ignoring
the time dimension and failing to explain how change and stability are intertwined in the evolution of
networks. In his view this happens, because most of the authors are interested in the structures of the
networks rather than the processes. In order to explain better the behavior of firms, he focuses on
20
process-oriented view of network and specifically on governance factors and shows how these factors
affect the maintenance and dynamics of the network.
The author states that a network is not only a dynamic structure, but also a stable one. It is
stable because its architecture does not vary, although its components can. Second, stability is an
outcome of interacting with others over time within the context of a continuing relationship.
The author points out that according to Easton and Lundgren (1992) there are at least two ways
to achieving a process approach to networks. The first way is to understand the workings of small
components in order to predict network processes. And the second way is to focus on general principles
that are responsible for the network's evolution, and to select general rules which allow a provident and
convincing explanation of the phenomenon (Drazin and Sandelans, 1992). Benassi claims that these
two approaches are complementary; however, he uses the second approach. Thus he focuses on
governance factors, in order to shed some light on the combination of dynamics and maintenance that
characterize the network.
According to Benassi governance factors constitute a key building-block on the way towards a
process approach, since they are responsible for change and stability in networks over time. He
recognizes two main components of governance factors: the network theory of the firm and the modes
of control.
According to Benassi, network theories are a key element in the governance factors, since they
influence the propensity to interact with others and the possible outcome of a connected set of cooperation processes. He characterizes network theories as follows below.
First, the network theories of different actors can vary greatly. Theories are influenced by the
history of the firm and by its organizational imprinting. Second, network theories do not arise in a
vacuum: they are developed by "single" firms through repeated cycles of interactions with others.
Third, network theories can be internalized to varying degrees within firms, thus affecting their ability
to interact with others.
Modes of control are to a large extent influenced by the network theory of the focal firm; they
refer to the criteria and rules used in selecting partners and in managing relations. Different criteria (3
modes of control) for choosing partners will lead to different network structures and performances.
The network theory of a firm affects its propensity to interact with others: for example, a
“strongly embedded” theory will lead the firm to substantial exchange with others, whereas a “weak”
one will make relations difficult or even contingent. At the same time the modes of control used by the
firm will influence the profile and the composition of its network, determining who will be selected
and how the relationship will be managed. The governance factors adopted by the focal firm are central
21
to an understanding of the dynamics and maintenance of a network. Different governance factors
produce different networks. Governance factors determine whether a (firm centered) network will have
a high or low level of dynamics, and whether the costs of maintenance will be high or low.
Benassi claims that the governance factors are responsible for both the dynamics and the
stability of networks. Both network theories and modes of control vary considerably. Having in mind
these two main components of governance factors, the network theory of the firm and the modes of
control, he compounds a 2 x 2 matrix, in which four possible network patterns are identified.
Benassi draws a matrix which can be represented as an outcome of different governance factors.
Table 3 - A networks’ typology
Dynamics
High
Low
Cost of
maintenance
Self-organized
networks
(Strong
network theory - focal
firm "knows" that its
performance and success
depend upon others;
Partners
are
not
dependent upon the
focal firm, rather they
apt
to
make
High are
autonomous
contributions;
Low
Dependent network (No network theory;
focal firm - propensity for short-term relations;
Low dynamics - changes depend upon
decisions made by the focal firm and then
transmitted to others; In structural terms similar to subordinate network, but the dyadic
relations occur between more stable actors)
Subordinate network (No network theory relies on internal growth and vertical
integration; Relations with others - driven by
simple make-or-buy decisions; Special
emphasis - on short-term decisions; Low
dynamics - others firms asked to conform to
the rules; In structural terms - the network
shaped by many dyadic relations between the
focal firm and its others, but ties among these
others will not be favored by the focal firm,
according to a "divide and conquer" strategy)
Source: Authors based on Benassi, 1995
The difference between the dependent and the self-organized network, in Benassi’s opinion, is
determined by the relational expertise of others. In the first case, the expertise is moderate: actors know
how to interact with the focal firm, but their propensity to interact with others is limited. The focal firm
must act as a bridge in facilitating the relation, which implies a high maintenance cost. Variations in
relations do not normally occur, but when they do they are mediated by the focal firm. On the other
hand, in the self-organized network, where relational expertise is high and widespread, the focal firm
does not have to devote its resources to facilitating and building relations among others.
22
Benassi acknowledges that this article of his represents only the first step towards a networkprocess approach and that in order to build convincing and coherent propositions on the evolution of
networks, three directions need to be explored.
The first concerns the origins of governance factors, an issue that he has not examined closely
in his paper. The second direction is connected with the micro-macro interaction in processes of change
within and between networks. Governance factors are very important in determining the configuration
of future networks; but small components are also at work in determining future states. Both need to be
taken into account at the same time, if we want to understand how networks combine opposite features
such as planning and improvisation. The third direction concerns the economic and competitive
outcomes of different networks typologies. If co-ordination costs have to be minimized, subordinate
and dependent networks can allow good results. However, if competition and selection are based on
innovation and dynamic economies of scale, directed and self-organizing networks should produce
better performances.
2000, “Coopetition” in Business Networks — to Cooperate and Compete Simultaneously, Maria
Bengtsson and SörenKock
Bengtsson and Kock argue that the network perspective applied on the concept of competition
is a good way to understand the relationships that develop through interactive processes. The authors
differentiate two types of relationships between competitors: vertical and horizontal. However, in this
article Bengtsson and Kock focus mainly on the horizontal relationships and argue that cooperation and
competition are needed in horizontal relationships, as the different relationships provide the firm with
different advantages.
The Concept Coopetition
Bengtsson and Kock claim that two firms can compete and cooperate simultaneously. If both
the elements of cooperation and competition in a single relationship are visible, the relationship
between the competitors is named coopetition.
Bengtsson and Kock define competitors as actors that produce and market the same products.
The coopetitive relationship is complex, as the firm simultaneously is involved in both cooperative and
competitive interactions with the same competitor at the same product area. According to the authors
the two different types of interaction are not divided between counterparts but between activities, since
it is impossible to compete and cooperate with the same activity.
23
The relationship between cooperation and competition can have different shapes depending on
the degree of cooperation and the degree of competition. They identify three different types of
coopetitive relationships between actors (Fig. 3).
Figure 3 – Different types of coopetitive relationships between competitors
Source: Ibid
Different logics of interaction
The idea behind competition is built on the assumption that individuals act to maximize their
own interest (Smith 1776; Hobbes 1651). However, a precondition for cooperation is that individuals
participate in collective actions to achieve common goals.
Giddens (1984) argues that individuals create structure through action, and that at the same time
they are restricted in their actions by that structure. The same reasoning holds for firms within a
business network as argued also by Håkansson (1987):
The network is the framework within which the interaction takes place but is also the result of
the interaction. Thus, it is affected by the exchanges between the actors.
Therefore, in order to better understand the division between cooperation and competition and
advantages provided by the two types of interactions, Bengtsson and Kock analyze at once the
structural conditions for cooperation and competition.
They analyze horizontal actors in different industries conducting interviews with CEO’s in each
industry. In order to make comparisons between countries, they select two Swedish industries - the
brewery industry (selling to consumers) and the lining industry (selling to industrial buyers), and the
Finnish dairy industry.
24
In their study they find that the division between cooperation and competition is either related
to the value chain or to the importance of business units. Regarding the value chain, the division is
based on what activities the actors perform in the activity chain and the value they hereby create. In
regards with the business units, the authors explain that competitors can compete in certain markets or
product areas while they cooperate in others.
Division between cooperation and competition due to the degree of closeness to customers and
between different business units
The empirical study shows that competition often takes place close to customers while
competitors can cooperate in activities more distant from the customer. However, the authors also find
some examples of the opposite situation in the same empirical work. In such situations, the cooperative
and competitive parts of the relationship are separated between different business units. Competitors
cooperate in some markets or product areas whereas they compete in others.
The division of interactions and advantages of coopetition
According to the empirical study firms divide the two parts of the relationship in different ways.
The authors of the article propose explanations to why and how the division can be made. The reasons
for the different kind of interactions can be found in the structure of the competitive network, relative
advantages used in the interactions with customers, the conflict between the two different logics of
interaction and the advantages provided by the two types of interaction.
Dependence due to heterogeneity in resources and to connectedness of positions
Proposition 1: “Heterogeneity in resources can foster coopetitive relationships, as unique resources
can be advantageous both for cooperation and competition.”(Maria Bengtsson and SörenKock,
“Coopetition” in Business Networks — to Cooperate and Compete Simultaneously, 2000)
Proposition 2: “The cooperative and competitive parts of a coopetitive relationship are divided
due to the closeness of an activity to the customer, in that firms compete in activities close to the
customer (output activities) and cooperate in activities far from the customers (input activities).” (Ibid)
Proposition 3: “The decision to either cooperate or compete in a specific product or market
area needs to be made with regard to all the competitors’ positions and the connectedness between
them, as a change in one relationship within the network may affect the other competitors’
relationships and positions.” (Ibid)
Conflicting Logic of Interaction
25
Proposition 5: “Individuals can not cooperate and compete with each other simultaneous, and
therefore the two logics of interactions need to be separated. The two logics of interaction inherent in
coopetition can be divided between different units within the firm, but if that are not possible the
conflict can instead be controlled and coordinated by an intermediate organization.” (Ibid)
Advantages Provided by the Different Interactions
Proposition 6: “The advantage of coopetition is the combination of a pressure to develop
within new areas provided by competition and access to resources provided by cooperation.” (Ibid)
2013, “Competition in business networks”, Hakansson and Ford
In this article four types of relationships are presented. This is the simplest business network
with 3 actors. „The concept of the market suggests that two conditions must be present for competition
to exist between actors: alternative actors and similarity.” The alternative actors compete with each
other for another actor who should choose between them. The alternative actors should be similar in
one or more dimensions and they should compete for something that is specified (David Ford 2013).
Network Structure 1: relationships between all of the actors
In this model we have three actors A, B and C. In this structure all of the actors have
relationships between each other and they think that it worth to work together. The companies have
decided to interact with each other so they will be able to solve a particular problem or issue. The
actors adapt their resources and activities to those of the others.
Figure 4 - Relationship between three actors
Source: Ibid, p. 1020
Actors may decide to not provide equal resources to the other partners. For example, actor A
may offer better quality and higher quantity to partner B rather than C. As a result, partners start to
compete with each other for stronger position. However, the fact that the actors have connection
between each other means that their relationships are important for all of them. They prefer not to force
26
competition in their interactions and in this way to avoid the risk of destruction of their ties. If the
three partners work in a good and effective way then they will decrease the costs and increase the
profits, especially with more extensive cooperation. In this network structure competition exists but it
is not on high level because if the actors choose to compete this will put the whole structure under risk
(David Ford 2013).
Network Structure 2: relationships between two pairs of actors
This structure is the result from structure one. The relationship here is just between actor A and
B or A and C.
Figure 5 - Relationship between two pair of actor
Source: Ibid, p. 1021
One of the reasons why actors B and C did not develop their relationship could be that their
resources and activities are not strongly related. As a result, the costs of this tie will be much higher
than the expected benefits. Another reason could be that actors B and C offer almost the same
resources and activities to actor A, so actor A uses them as alternatives. In addition, actor A may
interact with both of them just to provoke B and C to compete with each other and in this way to gain
advantage from this. However, competition is not able to explain this structure because even if B and C
compete, actor A collaborates with both. So the three partners play roles in these two relationships and
bring them to higher or lesser extent. Even if the relationship is between A-B and A-C, competition
between B-C is still possible. When one or both of them decide to manipulate the tie with A, this will
change their role in the relationship (David Ford 2013).
Network Structure 3: relationships between only one pair of actors
In this structure A and B have developed relationship but C does not have any connection with
A or B. There are two reasons for that. First it could be because C is unrelated to the other actors that
there is no reason to develop tie because costs will be greater than the benefits. The second reason is
27
because A and C are similar and the B choose between them. Most of the times B will start a
relationship with both of the actors and at some point its choice will be influence by the costs of
adaptation and the available resources of A and C (David Ford 2013).
Network Structure 4: no relationships between the actors
In this structure the three actors has no relation with each other. This could be because there is
no reason to connect and to adapt themselves or their resources and activities. Another reason could be
that they compete with each other. Competition means that actors believe that the benefits achieved at
the expense of others will be higher than those achieved through cooperation. In this model the actors
are very similar and they are alternatives to each other (David Ford 2013).
3.2 Theoretical platform
a) Network theory – Hakansson and Ford
In order to explain in depth the processes that occur in the network that encompass the focal
company (SAS) and the companies that it interacts with, the authors will need to base the further
discussion on the characteristics of a network, having in mind their main features. This topic is widely
investigated and analyzed mainly by Hakansson and Ford, who are the most cited authors when it
comes to network perspective of the business. Other authors in the same area only build onto their
propositions by viewing them through different company perspectives. This theme is well explicated
especially in the article “Managing networks” (2002) by Ford, Hakansson, Gadde and Snehota.
Therefore, we base our reflections on these authors.
The definition of a network provided by Hakansson and Ford in “How should companies
interact” (2002), also accepted by the authors of this paper is as follows:
“A network is a structure where a number of nodes are related to each other by specific
threads. A complex business market can be seen as a network where the nodes are business units —
manufacturing and service companies and the relationships between them are the threads. Both the
threads and the nodes in the business context have their own particular content. Both are ‘‘heavy’’
with resources, knowledge and understanding in many different forms (Hakansson, 1997).”
The characteristics of a network are: (“Managing networks”, 2002, Ford, Hakansson, Gadde,
and Snehota):
1) Interaction – companies as members of business network that consist of a large number of
active and heterogeneous companies that interact with each other in order to find solutions for
their problems. These interacted solutions affect several of the involved companies.
28
2) Interdependence – the actions of the companies within a network will be strongly influenced by
the attitudes and actions of those with whom they have relationships.
3) Incompleteness – no company alone has the resources, skills or technologies that it needs.
Being in a network provides access for companies to resources of others.
Figure 6 - A model in managing networks
Network
pictures
Networking
Network
outcomes
Source: Ibid
According to the authors of the article, Networking, Network Pictures and Network Outcomes
are all inter-connected, and not any of them automatically precedes the others and each affects and is
affected by those others.
Network picture is defined by Hakansson and the co-authors as a view of the networks through
the perspective of the participant in that network. The picture therefore, depends on the experience,
relationship and position that a company has.
Networking, according to the authors, includes all of the interactions of a company or individual
in the networks and it has the following characteristics (Ibid):
-
Interactivity;
-
Restricted freedom;
-
Not defined by conventional company categories (each company behave in a unique way);
-
Involves combined cooperation and competition;
-
Position and experience are central factors;
-
Incomplete knowledge (“learning by doing”);
-
Coping with network paradoxes;
Three aspects of networking are very important when trying to answer managerial questions,
which are related to three paradoxes as defined by Hakansson and Ford.
29
1st paradox – A company’s relationships are basis of its current operations and development, and at the
same time these relationships restrict that development.
2nd paradox – It is equally valid to say that a company defines its relationships or a company is defined
by its own relationship.
3rd paradox – Companies try to control network and want the benefits of control, however, when it
becomes total, it is destructive.
Each network is continuously producing network outcomes for each single participant in the
network both individually and collectively (Managing networks, 2002).
Having in mind all the descriptions and assumptions communicated by Hakansson and Ford,
the authors of this paper would like to further investigate the questions rose in “How should companies
interact in business networks” (2002). On the other hand, the authors will look also into the issue of
coopetition, which characterizes the nature of a network, and thus, became very popular topic in the
last years of research. Therefore, “Coopetition in business networks” (2013) will be viewed them
through the focal company’s (SAS) reality. Thus, the questions identified for further research in this
paper are:
1) How do SAS' resources influence their position in the network?
2) How does membership in alliance create advantages and disadvantages for SAS?
3) How do resources create opportunities and challenges for SAS?
b) Resource-based theory (RBT)
This section is based on Jay Barney and Delwyn Clark’s book called “Resource-based theory:
creating and sustaining competitive advantage” (2007). In this book, the authors give two explanations
for sustained superior firm performance: market power explanation and efficiency explanation.
However, the primary topic of the book is the resource-based theory which is related to the second type
of explanation.
Central assertion of the resource-based theory is that firms often possess different resources and
capabilities, and these different resources and capabilities enable some firms to implement valuable
strategies that other firms will find too costly to implement, and that these differences among firms can
be long lasting (Barney and Clark 2007, p. 248).
Barney and Clark explain in their book that the name of the theory, “resource-based”, is more a
“historical accident”. However, they use that name of the theory in their book as is it was the first name
used for this theory. Though, they state that the resource-based theory is not really about resources, but
about the attributes that the resources must possess if they are to be a source of sustained competitive
30
advantage (Ibid, pp. 249-250). In resource-based logic, a firm has a sustained competitive advantage
when it creates more economic value than the marginal firm in its industry and when other firms are
unable to duplicate the benefits of this strategy (Ibid: 54). Economic value, on the other hand, is
defined as the “difference between the perceived benefits gained by the purchasers of the good and the
economic cost to the enterprise” (Peteraf and Barney 2003, p. 314).
Barney and Clark point out four categories of resources (Barney and Clark 2007, p. 23):
-
physical capital (Williamson, 1975) – the physical technology used in a firm, a firm’s factory
and equipment, it’s geographical location and its access to raw materials (Ibid);
-
financial capital (Becker, 1964) – all a firm’s revenues, including its depth, equity and retained
earnings (Ibid);
-
human capital (Becker, 1964) – training, experience, judgment, intelligence, relationships and
insights of individual managers and workers in a firm (Ibid);
-
organizational capital (Tomer, 1987) – attributes of collections of individuals associated with a
firm such as firm’s culture, its formal reporting structure, its formal and informal planning,
controlling and coordinating systems, reputation in the marketplace, informal relations among
groups within a firm and between a form and those in its environment (Ibid);
However, over the years, many authors have tried to divide the wide range of resources
according to some other categories. Hence, Hall, 1992; Amit and Schoemaker, 1993; Penrose, 1959
and Bogaert, et al 1994 divided them into (1) tangible and intangible resources; Day, 1994; Day and
Wensley, 1988 classified them as being (2) strategic resources; while Greene, et al., 1997 said that (3)
social resources along to (4) technological and (5) location ones can also exist. Barney, 1991, Day,
1994; Amit and Schoemaker, 1993 considered as another categories (6) assets and (7) capabilities.
(Ferreira, Azevedo, Ortiz, 2011, p.100).
Not all of the resources of a firm are potential source of sustained competitive advantage. In
order to have this potential a firm resource must be:
-
valuable – it needs to exploit opportunities and/or neutralizes threats in a firm’s environment;
-
rare – it needs to be rare among a firm’s current and potential competition;
-
imperfectly imitable;
-
able to be exploited by a firm’s organizational processes;
These requirements represent the VRIO framework identified by the authors of the book. It will be
further discussed and applied to the focal company later in this paper.
31
3.3 Analytical framework
Penrose (1966) and the resource-based view (Barney, 1986) argue that resources are
heterogeneous and thus they lead to value creation irrespectively of the market conditions. “The
business network view starts with the same assumptions, and adds that exchange within a network
allows a firm to acquire knowledge about its relationship partners, including their resources, needs,
capabilities, strategies, and other relationships” (Johanson & Valhne 2009).
The IMP framework is based on the idea that by itself, a single economic resource is passive
and without value. It is the way that a resource interacts with other resources that define the nature of
that resource and have the potential to generate economic value. Interaction over time combines many
resources both new and old from many different locations (Business in networks, Hakansson, Ford,
Gadde, Snehota, Waluszewski 2009, p. 65). The characteristics, usefulness and value of company’s
resources depend on how they are combined with the resources of particular counterparts and how that
combination interacts with other related combinations of resources elsewhere in network (Ibid, p. 66).
According to Sepulveda and Gabrielsson (2013), internal resource growth and network
development have a strong relationship. Authors of this paper, therefore, intend to link the resources as
a competitive advantage within the firm and the resources that can be gained through a network, in
order to identify the factors which lead to a better performance of the focal company.
Figure 7 – The link between the applied theories and the focal company
RBV - resources
inside (Strength
& weaknesses)
Performance
Network resources outside
(Risks &
opportunities)
Source: Authors
32
CHAPTER 4 – ANALYZING SAS’ POSITION IN SCANDINAVIAN MARKET IN TERMS OF
NETWORKS AND RESOURCES
The main goal of this chapter is to see in what terms Network Theory and Resource-Based
View Theory identified and described in the previous chapter are applicable for SAS in comparison
with other three Star Alliance member companies: Lufthansa, Swiss and Turkish Airline. In order to
fulfill our purpose, multiple steps must be followed.
1. Firstly, authors aim to find out who can regulate the airline industry and also who can create and
control a network in this industry and how is this applicable for SAS.
2. The second step to be followed was to analyze internal environment (represented by ResourceBased View Theory) in order to see what SAS’ position in the market is and if the resources that it
holds can offer to the firm the chance to overcome its downturn from the last 4 to 5 years.
Regarding examination of internal environment it was established to use some tangible (location
and aircrafts) and intangible resources (like brand name, ground and air services) of both: SAS and
its competitors stated above. By applying VRIO framework authors proposed to see if SAS’
resources present the necessary characteristics which can offer it a competitive advantage and help
it to improve its negative performance.
3. As a third part of this chapter it was decided to analyze external environment by looking at the
relationships (in terms of collaboration, competition or both) between SAS and the other three
companies and see if any of these types of connections bring a benefit to SAS. However, the
“reverse of the medal” of a network identified as “paradoxes” in the previous chapter – literature
review it also was submitted to discussion. Therefore, authors aim to review if “the relationships of
our focal firm became restrictive for its growth” – paradox 1; “if the company defines its
relationships or is defined by its own relationship”- paradox 2 and “if SAS controls its networks, or
it’s controlled by its networks” – paradox 3;
4.1 Main Airline Industry Regulators
There are two main global Air Transportation regulators-organizations which set up rules and
help to protect the environment called IATA and ICAO. These two agencies are closely related and the
cooperation between them is vital. It is important to mention that “to ensure that cooperation between
IATA (representing the international airline operators) and ICAO (representing the various national
governments) is simple and effective, and that they work closely together to further the development of
international civil aviation, both agencies’ headquarters are located in Montreal, Canada from their
inception in 1945”. There is a constant interaction between IATA and ICAO in terms of the Air
33
Navigation Bureau, the Regional Affairs Office and the Air Navigation Commission. IATA is also
contributing and collaborating with diverse ICAO technical panels (www.icao.int/iata air transport
association.htm). All members have certain commitments which are necessary to follow. Moreover, all
member airlines as well as airports worldwide have different IATA and ICAO codes (for example,
Scandinavian Airlines’ IATA code is SK and ICAO code is SAS). In order to understand IATA and
ICAO importance for airline industry worldwide, both organizations are presented in depth further in
this chapter.
International Air Transport Association (IATA)
IATA is the trade, non-governmental organization representing 240 airlines worldwide with
around 84% of total air traffic. In other words, it can be defined as a mediator between the industry and
the governments. The mission is “to represent, lead and serve the airline industry”. IATA is also
described as an advocate which sets up the rules and regulates airlines at the same time. In order to be
a member of IATA, all airlines are obligated to complete the IATA Operational Safety Audit (IOSA) –
a global standard for operational safety management (www.iata.org).
The main goals of IATA are:
 Improve fuel efficiency 1.5% a year
 Carbon neutral growth from 2020
 Cut net emissions 50% in 2050 (compared with 2005) (www.iata.org)
The IATA importance is on a high level. First of all, it creates a network between the member
airlines which includes the main important ones in Scandinavian region such as SAS, Lufthansa, KLM
and others. It is also relevant to mention that 2012 has been the safest year in the airline industry which
was delivered by common commitment, cooperation and global standards (IATA annual report, 2013).
Being a member of IATA also gives an advantage for particular airlines including simplifying
the Business (StB) projects such as:
 Bar Coded Boarding Passes (when passenger is available to print their boarding pass at home
or it can be accessed from a mobile phone for much convenient and faster on-line check-in. Bar Coded
Boarding Passes also reduce paper by using only one boarding document for the entire journey)
 Baggage Improvement Programme (when the lost baggage is a costly problem that affects
both airlines and passengers. Baggage Improvement Programme seeks to decrease the amount of
mishandled baggage by improving handling processes to make sure that passengers get their baggage at
the final destination)
34
 Fast Travel (The Fast Travel initiative will give travelers more control by designing a range of
self-service options that will enable the passenger to manage many aspects of the departure and arrival
processes) (IATA annual report, 2013).
International Civil Aviation Organization (ICAO)
ICAO is a United Nations’ specialized organization which was created in 1944 in order to
promote the safe and organized development of international civil aviation in the world. ICAO main
strategic goals are to regulate and set the standards for aviation security, safety, efficiency and also to
protect the environment and sustainable development of Air Transport. There are 191 member airlines
which are served by the ICAO as the “forum for cooperation in all fields of civil aviation”
(icao.int.aspx). ICAO works closely with other United Nations members such as the World Health
Organization
(WHO),
the
World
Meteorological
Organization
(WMO),
the
International
Telecommunication Union (ITU), the Universal Postal Union (UPU), and the International Maritime
Organization (IMO), the World Tourism Organization (UNWTO) - (www.icao.int).
The importance of alliance
Now that regulators of airline industry were identified, we intend to also discover who can
create and control a network in this industry and how is this applicable for SAS.
The nature of the industry requires to satisfy customers demand of going from “anywhere to
anywhere”. Since this thing is impossible to do in an effective way only by one company, it is
necessary to find partners that can help it to fulfill clients’ requests (www.iata.org). By finding these
partners, a network is created, which in airline industry appears under the name of alliance.
Concerning our study company (SAS), it can be said that it built its network by becoming a
member (since 1997) of one of the most known alliance: Star Alliance.
However, alliance membership can bring both: advantages and disadvantages. According to
Worldwide Air Transport Conference, Sixth Meeting, Montreal, 2013, these are as follows:
Benefits:
1. The decrease in ticket prices when linking cities to each other. The big number of passengers
on these flights allows for an increase in aircraft load factor, lowering thereby trip costs and serving
interests of both passengers and carriers.
2. Airlines were also able to provide passengers with varied flight schedules and a wider choice
of take-off and landing times, which lead to reduced travel time.
35
3. Alliances seek to improve quality standards and passenger services, and apply minimum
standards at all stages, including ticket sales, choice of destinations, baggage procedures, lounges,
passenger travel, passenger complaints, and provision of necessary services.
Disadvantages:
1. Alliances may not respect antitrust rules. They can result in the exclusion of some companies
from the market, and violation of fair competition standards.
2. Due to their control of many key points and their competitive and marketing powers,
alliances could lead to the collapse of some companies that have to compete as low-cost companies; in
this case SAS and its strong competitor-Norwegian airlines.
3. Alliances have grown dramatically, making their partnerships increasingly complex.
4.2 The analysis of SAS’ internal environment – a comparison of its resources with those of
Lufthansa, Swiss and Turkish Airlines
In this sub-chapter, the authors of the project will first explain why Lufthansa, Swiss and
Turkish Airlines were chosen as SAS’ competitors. Secondly, it will be analyzed and compared the
resources of these companies mentioned above with those of SAS’ and identified if they are good
enough to offer to our study company a competitive advantage. Therefore, the explanation for why the
attention was put on exactly these airlines lies in fact that, first of all, Turkish airlines, Lufthansa and
Swiss International Airlines took place in world's top 20 airlines for Europe in 2013 (Skytrax, 2013).
The results of the ranging list were based on online survey questionnaire asking travelers about their
experience with different airlines on the ground and on board in period of 10 months (Skytrax, 2013).
The survey involves people from first class to economy class. Turkish airlines are put on 9th place,
Lufthansa airlines are on 11th and Swiss International Airlines are on 16th. These companies are part
of Star alliance group and they serve Scandinavian market. Even if Scandinavian airlines are not in the
top list, they are one of the main players in Scandinavia and they participate in Star alliance as well.
Secondly, according to Skytrax, Turkish airlines took top position in the following categories:
Best Airline Staff Service, First place in Best Business Class Catering, Best Economy Class Catering,
Premium Economy Catering, Best Business Class service. Lufthansa airlines were in top position for:
Best Airline Staff Service, Best First Class cabin service, Best First Class Seats, Best First Class
Lounge, and First Class Catering. As for Swiss International airlines they were rewarded for: Best
Airline Staff Service, Business Class Catering, and Best Business Class Service.
As can be noticed, all three companies were positioned in top five in Europe for the category
“The Best Airline Staff Service Awards” (Skytrax, 2013).
36
After explaining the reasons of selecting the three mentioned airlines as main competitors for
SAS, authors will focus on fulfilling the next goal settled up in the beginning of this sub-chapter:
finding out if SAS can rely on its resources in order to overcome their financial problems. Hence,
according to what has been identified in literature review, resources could be classified in many ways.
However, considering the purpose of the project it was concluded that classification of resources
according to tangible and intangible category suits the best (Hall, 1992; Amit and Schoemaker, 1993;
Penrose, 1959 and Bogaert, et al 1994). The resources which will be analyzed were chosen in
accordance with RBV theory’s assumptions, which are: resources must be heterogeneous and
immobile. Therefore, considering that tangible resources are often seen as “common resources”,
because they can be easily sold / bought or copied by other firms, the authors will focus only on two of
them (i.e. location and aircrafts). These two resources can represent an advantage for the company if
their costs are low or/and their usage can ease the firm’s service provision. Regarding intangible
resources brand name and services will be used.
Tangible resources:
Geographic location:
As it already known, in any business geographic location is an important factor for company’s
success, because it can offer access to new resources and knowledge that could help it to do something
better than its competitors (Harvard Business School-working knowledge). Regarding airline industry,
this resource might be placed among the most important, because the access that the airline company
can have to the airports of the other countries depends on it. Moreover, if the costs of the geographic
position of the company are low this can bring a competitive advantage to it.
Concerning SAS, it can be said that its geographic location is not counted among its strengths
because, according to their annual report from 2012, SAS’s “historical legacy and a geographical home
base in three countries have created an overly costly and inflexible cost structure”. Moreover, its
Nordic location does not offer the opportunity to reach so many countries within a specific period of
time (see map below).
However, it was decided to measure the strength or weakness of geographic location of the four
companies submitted to the analysis by looking at two variables: the number of countries that they can
reach in 3.5 hours and the population growth of the countries in which are settled the mother
companies. The reason of selecting of selecting this period of time is explained in the book of Nawal
K. Taneja, 2010 (Looking Beyond the Runway) which says that Turkish geographic location allows
them to reach „55 countries located within 3.5 hours of flying time”; what “provides them an enormous
37
potential for increasing the transit traffic”. Therefore, authors have created four maps in order to
illustrate the number of countries that SAS, Swiss, Lufthansa and Turkish Airlines can reach from the
home base airport (with direct flights) within the period of time mentioned above and find out their
location resource and growth potential.
FOR SAS (28 countries)
Source: Authors based on SAS’ website - www.sas route map.com
Note: SAS does not have direct flights to Albania, Macedonia, Bulgaria, Serbia, Montenegro,
Bosnia & Herzegovina, Croatia, Romania, Moldova, Ukraine and Slovakia (11 countries in total).
FOR SWISS (42 COUNTRIES)
38
Source: Authors based on Star Alliance map website (routemap.staralliance.com)
Note: Swiss do not serve: Algeria, Tunisia and Libya, even if they are within the circle
FOR LUFTHANSA (50 countries)
Source: Authors based on Star Alliance map website (routemap.staralliance.com)
FOR TURKISH (55 countries)
Source: Authors based on Star Alliance map website (routemap.staralliance.com)
39
As it can be seen from the maps Turkish Airlines covers the most countries (55) compared with
the rest of the airlines (Lufthansa - 50, Swiss – 42 and SAS – 28), because they have access not only to
all Europe but also to some countries from Middle East and Africa. By contrast, SAS is in the worse
position because they can reach only Europe; even so they do not have direct flights to 11 countries
within the circle of the map (see note from page 38). The central position in Europe of Lufthansa
Airlines provides them the opportunity to reach both: Europe and North Africa. However, they cannot
go to Middle East as Turkish Airlines. Regarding Swiss International Airlines, even if they are able to
serve North Africa within the period of time mentioned above, they do not offer any kind of services
there (direct or through connections).
Another location variable to be analyzed is the population growth which directly influences the
growth of the airline companies. “Turkey’s population of 74 million and its larger land mass affords
Turkish the kind of domestic market that others can only dream of, for example” (Rivers, 2013).
Moreover, Turkey will increase up to 83 million in 2025 (Institute u.d.).
On the other side, the population forecast for Germany shows a decrease of 1, 4 million up to
2025. Swiss will increase just with 162.000 people and Scandinavian countries (Norway, Sweden and
Denmark) will rise with about 958.000 people (Institute u.d.)
Because a comparative analysis is intended to be done for all the resources brought in
discussion, scales for each of them have been created.
Therefore, the scale for the two geographic location variables can be seen below, as it follows:
First variable: number of countries reached within 3.5 hours
- Companies that reached below 35 countries received 0 points
- Those firms that could reach between 36 and 40 countries obtained 1 point
- Firms whose number of countries reached is 41 to 45 – 2 points
- For companies that can reach between 45 and 50 countries – 3 points
- For firms that can reach between 51 and 55 – 4 points
The table below provides information about the scores that each company has according to the
scale explained above.
40
Table 4
Airline company Number of countries reached
Points
by each of these companies
SAS
28 countries
0 point
Swiss
42 countries
2 points
Lufthansa
50 countries
3 points
Turkish Airline
55 countries
4 points
Source: Authors
As it can be noticed from the table 4, Turkish Airlines received the highest score of 4 points,
Lufthansa got 3 points and Swiss took only 2 points. However, SAS got 0 points, due to the fact that
the number of countries they reach is below 35.
Second variable: population growth of the mother company’s country
- For the country whose population will increase up to 100 000 people obtained 0 points
- The country that will register a rise stated between 100 001 and 500 000 – 1 point
- The country whose population growth will be in the range of 500 001 – 1 000 000 – 2 points
- The country that will have a population growth between 1 000 001 and 2 000 000 – 3 points
- The country that will have an increase of over 2 000 001 – 4 points
The table 5 shows the number of people who are estimated to increase in core countries of the
parent companies submitted to the analysis.
Table 5
Amount of population
growth/decrease
+ 958 000
2 points
+ 162 000
1 points
Lufthansa-Germany
- 1 400 000
0 points
Turkish Airline-Turkey
+ 9 000 000
4 points
Airline company
SAS - (Norway,
Sweden and Denmark)
Swiss-Switzerland
Points
Source: Authors
Regarding the scores that airlines took according to the scaling for population growth, it can be
said that Turkish register the highest score again, while on the second place is, this time, SAS.
Lufthansa received 0 points, because of the estimated decrease of 1.4 million people in the next decade.
41
Aircrafts:
The second tangible resource which will be used to get better knowledge for the chosen airline
companies are aircrafts. The maintenance of aircrafts is one of the most crucial elements which
influence the success of an airline company (Aircraft maintenance at Lufthansa Technik). The three
variables which will help to explain aircrafts as a resource are the following: number of airplaine
owned by an airline, number of models and average age of the planes. The reason of chosing these
three particular variables is that all of them require costs of maintainance. If airlines have too many
models of airplanes and they are too old, the costs of maintainance will be high; this fact can lead to the
firms downturn. In March 2013 CAPA conclued that the diversity and the age of SAS’ airplaines are
one of the reasons for their high costs (CAPA, 2013). Therefore, authors will compare the number of
models that the four companies are using and their age. However, SAS already starts a plan for
modernalisation. In the future they will use only one type of airplaine for short/medium-haul flights
from each base: A320 family at Copenhagen, and Boeing 737NG at Oslo and Stockholm ( www.dst.dk,
home3.swipnet.se).
Figure 8
Source: SAS annual report 2012
In addition, Scandinavian Airlines phased out the last McDonnell Douglas MD 80 series and
left only 3 airplanes 737 Classics. Both types of aircrafts are very old and noisy. As a result, “tightened
noise restrictions at many major European airports such as LHR, CDG and BER mean that airlines
operating older and noisier aircraft are being levied landing fees in excess of the base rate”. Moreover,
newer aircrafts are faster and it takes them less downtime, which makes airline more competitive with
42
the low-cost companies (The fate of the 737 Classics – Slimmer prospects for pilots in Europe, 2012).
Finally, the modernisation and rationalisation of some types of SAS airplaines will bring the company
a chance to save money in terms of fleet maintenance, crew training and fuel efficiency (CAPA, 2013).
Analyzing aircrafts as resources for the airlines will provide us with useful information about
their strategies and position in the market.
Scandinavian Airline System (SAS)
In October 2013 SAS had 156 aircrafts, 9 models and the average age was stated to 10.5 years.
Figure 9
Source: (Star Alliance website, 2013)
Swiss International Airlines
The number of aircrafts of this company is 92, 6 different models and the average age is 11.5.
43
Figure 10
Source: (Star Alliance website, 2013
Lufthansa Airlines
Lufthansa airlines have 360 aircrafts, 13 models and the average age is 12.1 years.
Figure 11
Source: (Star Alliance website, 2013)
44
Turkish Airlines
Turkish Airlines have 233 aircrafts, 12 models and the average age is 6.6 years.
Figure 12
Source: (Alliance, 2013)
For a better understanding of SAS aircrafts characteristics compared to Lufthansa, Swiss and
Turkish Airline, there is a table below.
Table 6
Airline company
Number of aircrafts
Models
Average age
SAS
156 airplanes
9 models
10.5 years
Swiss
92 airplanes
6 models
11.5 years
Lfthansa
360 aircrafts
12 models
12.1 years
Turkysh Airlines
233 aircrafts
13 models
6.6 years
Source: Authors based on Star Alliance website, 2013
From the figures above, it is obvious to say that Lufthansa Airline have the most aircrafts
compared to Turkish Airlines - 233, SAS – 156 or Swiss with only 92 pieces. But in the same time,
Lufthansa has the most models (13) and the average age is the highest (12.1 years). By contrast, the
average age of Turkish Airlines’ aircrafts is the lowest (6.6 years), even if in terms of models numbers
they are positioned on the second place (12 models). Most of Turkish’ aircrafts are narrow bodied.
According to Kotil, CEO of the company, the carrier was “traditionally a narrow body airline” and “if
45
you removed the wide bodies from Turkish, still the narrow bodies alone would make a profit”. The
age of the aircrafts is another advantage. “With average aircraft age of six years and high utilization,
Kotil says that its cost per available seat kilometers (ASK) is lower than all of its European legacy
competitors at $0.08 and not far above Europe’s most efficient low-cost carriers. “
(www.flightglobal.com– Temel Kotil interview).
The scale for noting the three aircrafts variables can be seen below:
First variable: number of aircrafts
- Companies that have below 50 airplanes will be noted with 0 points.
- For airlines firms whose number of airplanes is between 51 and 100 received 1 point.
- Those airlines that have the number of aircrafts in the range 101 and 200 – 2 points.
-The companies that have a number of planes stated in the interval of 201 and 300 – 3 points.
-And firms with the number of planes situated between 301 and 400 – 4 points.
In the table 7, it can notice the scores that each company received for the number of planes that
it owns.
Table 7
Airline company Number of aircrafts
Points
SAS
156 airplanes
2 points
Swiss
92 airplanes
1 point
Lufthansa
360 aircrafts
4 points
Turkish Airlines
233 aircrafts
3 points
Source: Authors
It is noticeable that for the number of aircrafts factor, Lufthansa scores the best (4 points),
Turkish Airlines is on the second place (3 points) and SAS on the third one (with 2 points), while Swiss
is situated on the last place with 1 point.
Second and third variable: number of models of airplanes and average age
Due to the fact that it was identified that both factors: numbers of models and average age
negatively affects companies’ costs if they are too high, authors decided to make the scale in a reverse
way. This means that airlines with many models and highest average age will receive the lowest score
(1 point), while those with the lowest number of models and average age will get the most points (the
maximum of 4).
46
Table 8
Airline company
Models
Points
Average age
Points
Total points
SAS
9 models
3
10.5 years
3p
6p
Swiss
6 models
4
11.5 years
2p
6p
Lufthansa
12 models
2
12.1 years
1p
3p
Turkish Airlines
13 models
1
6.6 years
4p
5p
Source: Authors
As can be seen from this table, SAS and Swiss register the highest point (6), which means that
the planes models and their average age is not the worst. Turkish comes next with 5 points, while
Lufthansa is on the last position with 3 point; this means that they have too many models and they are
also old.
Intangible resources:
Brand name:
The third resource analyzed is the brand name of the companies. In the last 15 years,
information and communication technology were tremendously developed. As a result, the importance
of third parties and sales agents decreased. More and more people buy their tickets online because of
the technological advancements. (Holloway, 2008: 342-443). Therefore, since all of the airline
companies have online presence, the authors of this project argued that the strength of the companies’
brand can be measured in Facebook likes. Another reliable source which provides information about
customers’ opinion and satisfaction is Trip advisor webpage. According to Christine Petersen, the
president of Trip Advisor, the webpage has a big team who is taking care for the content quality and
integrity. Reviews are checked through IP address and email address of the author. The team is also
going for further investigation if it thinks that the content is suspicious. Trip advisor has highly
effective fraud system, so the authors of the project believe that it is good source of reliable
information which can give a more qualitative indication of how companies rank amongst customers.
Therefore, in table 9 some information about these two indicators: Facebook likes and Trip
Advisor scores are provided. As for the first indicator, the authors divided the number of likes of each
airline to the total likes (in this case: 5 742 921) of all companies and the following percentages were
obtained:
- SAS = 547 340 / 5 742 921 = 9.6%
- Swiss = 396 550 / 5 742 921 = 7 %
47
- Lufthansa = 1 452 740 / 5 742 921 = 25.2%
- Turkish Airlines = 3 345 291 / 5 742 921 = 58.2%
In order to make the terms comparable, a scale for both used indicators was made:
Facebook likes:
- The companies that scored below 5% received 0 points
- Those firms that were in the range 5.1% and 25% – 1 point
- For the airline companies that were stated between 25.1% and 50% – 2 points
- For that company that had over 50.1% – 3 points
Trip advisor:
Because the scores (expressed in percentages) of each company identified on this website are
really close, authors decided to give them points in an ascending way: 1 point for the lowest percentage
and 4 points to that airline that has the highest percentage.
Table 9
Airline company
SAS
Facebook likes (%) Trip advisor (%)
9.6% = 1 point
70% = 2 points
Total score
3 points
Swiss
7% = 1 point
75% = 4 points
5 points
Lufthansa
25.5% = 2 points
71% = 3 points
5 points
Turkish Airlines
58.2% = 3 points
60% = 1 point
4 points
Source: Authors based on companies’ Facebook pages and Trip Advisor website
As can be seen from this table 9, the companies that register the highest score are: Lufthansa
and Swiss, mostly because of the percentages values that they acquired through Trip adviser indicator.
By contrast, SAS has again the lowest score, which can mean that their clients are not very satisfied
with them.
Services:
The Services of the four companies will be the last resource which will be analyzed. The reason
of focusing on services in airline industry is the importance for company’s performance since they are
directly related to customers’ satisfaction. The increasing customers’ demand for airline services force
the companies to constantly innovate their services and technology used to deliver services and better
safety to the consumers (Ringle, Sarstedt, & Zimmermann, 2011; Roades & Waguespack Jr., 2008). A
consumer's opinion about the overall performance of a product or service is one of the most important
determinants of brand loyalty (Zeithaml, Bitner, & Gremler, 2009). Customer purchase behavior
48
depends on the service quality that a company could offer and as a result is essential for the success of
the organization (Zeithaml, Berry, & Parasuraman, 1996).
The described services will be divided in three categories: ground service, air service and
others (which include: price and safeness) and all will be analyzed according to business and economy
class. The ground services contain: check-in, baggage, punctuality, lounge, and boarding, while the air
services combine: cleanliness, seat comfort, entertainment, dishes, beverages, service, restrooms, and
extras. The scores are based on Flight Score website, which was special created for customers who
want to write reviews about their airline experience in terms of services categories. According to the
website, the score meaning is: 10 = excellent and 1 = inadequate (Flightscore.com). In table 10, the
data about companies’ scores according to the just mentioned website was provided.
Table 10
Airline
Company
Gorund service
Board service
Price and safeness
Overall rating
Business Economy Business Economy Business Economy Business Economy
SAS
7.27/10
6.12/10
7.11/10
5.31/10
8.02/10
6.80/10
7.46/10
6.08/10
Swiss
Lufthansa
7.27/10
7.12/10
6.58/10
6.30/10
7.52/10
7.10/10
6.53/10
5.99/10
8.73/10
8.11/10
8.02/10
7.43/10
7.84/10
7.44/10
7.05/10
6.58/10
Turkish
6.81/10
5.74/10
6.97/10
5.60/10
Source: Authors based on Flight Score website
7.75/10
6.91/10
7.18/10
6.09/10
As can the table above illustrates, both: individual category and overall rating for business
class of each airline are very alike. In the overall scoring column for business class it can be seen that
for business class Swiss registered the highest grade (7.84/10), while Turkish Airlines had the lowest
one (7.18/10). As for economy class, Swiss is again on the first place (with 7.05/10), closely followed
by Lufthansa (6.58/10) and Turkish (6.09/10) and SAS with 6.08/10.
However, in order to be able to make a comparison of these companies’ resources in the end of
the sub-chapter, the authors need to keep their way of scoring. Thus, points from 1 to 4 will be offered
to the companies: 1 point for the airline that rated the worst and 4 points for that which rated the best
(see table 11).
Table 11
Airline Company
Business Class
Economy Class
Total points
SAS
7.46/10 = 3 p
6.08/10 = 1 p
4p
Swiss
7.84/10 = 4 p
7.05/10 = 4 p
8p
Lufthansa
7.44/10 = 2 p
6.58/10 = 3 p
5p
49
Turkish Airlines
7.18/10 =1 p
6.09/10 = 2 p
3p
Source: Authors
As can be seen from the table above, a greater discrepancy appears amongst our study airlines
in terms of authors’ way to score. Consequently, Swiss has 8 points, followed by Lufthansa with 5
points, SAS with 4 and Turkish with only 3 points.
For a clearer picture of the scores of all resources’ variables and indicators described and
analyzed so far, the table below was made:
Table 12
Airline
SAS
Swiss
Nr. of
Population Nr. of Nr. of Average Facebook Business Economy Total
countries
growth
planes models
age
+ Trip
class
class
Points
reached
Advisor services services
0p
2p
2p
3p
3p
3p
3p
1p
17 p
2p
1p
1p
4p
2p
5p
4p
4p
23 p
Lufthansa
3p
0p
4p
2p
1p
5p
2p
3p
20 p
Turkish
4p
4p
3p
1p
4p
4p
1p
2p
23 p
Source: Authors
As the above table illustrates, Swiss and Turkish are on the first position with 23 points, closely
followed by Lufthansa with a total of 20 points, and on the last position is SAS with 17 points.
According to these points, SAS position in the Scandinavian market compared to the other airlines in
terms of its resources is the worst. It can be also conclude that SAS’ needs to improve some of its
resources like: number of aircrafts, band name and even services (especially the economy ones).
Regarding geographic location, SAS can still exploit it. One opportunity is offered by the 11 countries
within Europe, which SAS does not serve yet (according to the map from the page 38), for reasons
unknown to us.
Now that the focal company’s position in the market was identified, the authors intend to see if
the resources described and analyzed above can still offer to it a competitive advantage and help the
company to overcome its financial decrease from the last 4 to 5 years. In order to accomplish the above
mentioned purpose, VRIO framework will be applied.
According to Barney (1991), VRIO framework can be used to analyze both: internal and
external environment in terms of resources. However, in our case will be used for evaluating only those
tangible (geographic location and aircrafts) and intangible resources (brand name and services) which
are considered to belong to interior environment of the firm. VRIO is an abbreviation for the four
questions that you ask about a resource or capability to determine its competitive potential: the
50
question of Value, the question of Rarity, the question of Imitability (Ease/Difficulty to Imitate), and
the question of Organization (ability to exploit the resource or capability) - (Barney, J.B. - Strategic
Management Journal, 5, 1991, pp. 171-180).
The Question of Value: “Is the firm able to exploit an opportunity or neutralize an external
threat with the resource/capability?”
The Question of Rarity: “Is control of the resource/capability in the hands of a relative few?”
The Question of Imitability: “Is it difficult to imitate, and will there be significant cost
disadvantage to a firm trying to obtain, develop, or duplicate the resource/capability?”
The Question of Organization: “Is the firm organized, ready, and able to exploit the
resource/capability?” (Ibid)
In order to see if the above mentioned resources fulfill these requirements of VRIO framework,
the authors of this project will make use of the information provided within this chapter, including the
scores that authors gave to each of them.
Therefore, the first resource to be analyzed is GEOGRAPHIC LOCATION.
Value question: The only opportunity that can arise from the location exploitation is
population growth prognosis, which can lead to an increase in domestic flights, and automatically to a
revenues’ growth. The second variable of location (number of countries reached within 3.5 hours), was
not taken into account, since in our above analysis SAS scored 0/4 points. As for annihilating a threat,
it was considered that this specific resource cannot be used for something like that (for example to
neutralize a threat of entry, or one of rivalry). Because it does one of the things mentioned in the main
question (offers to SAS’ the chance to exploit an opportunity), it will be seen as a valuable resource.
Rarity question: According to Barney’s & Hesterly’s definition rarity refers to the uniqueness
characteristics that a company’s resource can have compared to its competitors. If a firm’s resource /
capability is both: short in supply (the quantity of goods expected to be delivered in a certain period of
time is lower) and persist over time it can be considered “rare” (Barney & Hesterly, 2011 - Strategic
Management and Competitive Advantage: Concepts and Cases). Concerning location’s variables
analyzed within this chapter (number of countries reached in 3.5 hours and population growth) it can be
said that they do not fulfill the requirements of this “rarity” factor. The first variable is definitely not
short in supply, since in order to establish a connection in a country depends on its political and
economic environment which can be costly and can take a lot of time until the airline can receive the
approval to serve it. Regarding population growth, it cannot be acquired by SAS (to be said that is short
51
in supply) and its persistence is relative due to the fact that is just a forecast. Consequently, location
will not be taken into account as being rare.
Imitability question: The main question of “imitability” concerning internal analysis is that
“Do firms without a resource or capability face a cost disadvantage in obtaining or developing it
compared to firms that already possess it?” - (Hill & Jones - Strategic Management, 1998, p. 75). The
logical response for this question should be “yes”; firms that lack a resource register high costs to
acquire it. But for our focal company, the question is “do other firms to imitate SAS geographical
location, since it has its home base in three countries, fact that created an overly costly and inflexible
cost structure?” (SAS’ annual report, 2012). The answer should be “no”; consequently, SAS’ location
will not be considered as difficult to imitate.
Question of Organization: Regarding the question of the last indicator from VRIO framework
(organization), it can be mentioned that SAS is ready to exploit its geographic location, as the
company’s history is rooted deep in the Nordic countries.
The next resource submitted to analysis is SAS’ AIRCRAFTS fleet:
Value question: Concerning aircrafts it can be argued that all three variables previously
analyzed (number of planes, number of models and average age) can create for SAS the opportunity to
reach a higher number of both: countries and passengers. This can be done in a more effective way
when the numbers of airplanes owned are as youngest as possible and their range models is not very
wide.
This resource can also be useful for neutralizing a threat of rivalry, for example, if the
characteristics of variables mentioned above are maintained. As for SAS, the good score (8/ 12 points)
which it accumulated in the previous analysis within this chapter (see table 7 and 8) made the authors
of this project to conclude that the company is capable to answer with “yes” to both: opportunity and
threat questions; consequently, SAS’ aircrafts will be considered a valuable resource.
Rarity question: The rarity requirements (resources must be short in supply and persistent over
time) are the most applicable for this type of resource. According to Civil Aviation, in order to build an
airplane might take about three months for a Boeing 777 (which has two engine), for example and
much more for those with three or four engines. This thing means that “short in supply” factor can
happen to an airline if orders new aircrafts. As for the “persisting over time” indicator, again suits well
to aircrafts, since they are built to withstand for decades. Consequently, aircrafts will be taken into
account as being rare.
52
Imitability question: Even if imitating a competitor range of airplanes models might be costly,
they are not impossible to copy. Since airplanes are tangible resources, which according to Barney,
1991, they are “common resources”, because they can be easily sold / bought or copied by other firms,
we will not considered them a resource difficult to imitate.
Question of Organization: Regarding organization indicator for aircrafts analysis, it can be
argued that SAS is exploiting its fleet. An information that can strengthen authors’ argument is that
SAS planned to replace its old and noisy airplanes with new ones (for example, McDonnell Douglas,
Boeing 737 Classic and 717 will be replaced with Boeing 737 NG) – Star Alliance website, 2013.
The third resource to be analyzed by applying VRIO framework is SAS’ BRAND NAME.
Value question: In order to find out SAS’ “brand name” value it will be taken into account the
overall rating for Facebook likes and Trip Advisor scores from the table 9. As can be noticed from that
table, SAS registered the lowest score of 3 points out of the maximum 8. Since its customers are not
satisfied at all with them, we cannot consider its brand name as being a valuable resource.
Rarity question: For this intangible resource only the persistence over time can be applicable.
However, without being valuable, a resource cannot be rare; thus the answer for “rare” factor is “no”.
Imitability question: For a new entry company that does not have established yet a brand
name can be costly in both terms: time and money to create that firm’s awareness amongst customers.
However, SAS’s continuum decrease in its popularity does not “temp” either of new entrants or “old
players” of airline industry to copy their brand name. Anyway, if cannot be imitate, for sure can be
ruined. For the reasons stated above, the authors will not define SAS’ brand name as an imitable
resource.
Question of Organization: If one firm’s resource is not valuable, rare or difficult to imitate it
is hard to claim that the company is prepared to exploit it. Therefore, the answer for this question is
again “no”.
The last category of resources submitted to VRIO analysis is SAS’ SERVICES divided in
business and economy services.
Value question: For identify if SAS’ business and economy services bring any value to it, the
overall scoring that it was made previously in this chapter will be taken into consideration (see table
11). For business category the focal company registered 3/4 points, while for economy class rated just
1/4 points. According to these results it can be concluded that business category services might be
valuable for SAS, but this thing cannot be said about the economy class too.
53
Rarity question: Concerning these categories of services, they cannot be seen as “rare”, since
all the others airlines carriers offer them to their customers too.
Imitability question: For this indicator the answer will be again “no”, since the other
companies do the same as SAS, or even better than it.
Question of Organization: This factor can receive a positive response, because SAS uses
these kinds of services, and as for the business class, it seems to do fairly well, if the scores identified
in table 11 would be again considered.
For a better understanding of the above examination of SAS’ resources by applying VRIO
framework, the table below was provided:
Table 13
Location
YES
NO
Costly to
imitate?
NO
Aircrafts
YES
YES
NO
YES
Brand name
NO
NO
NO
NO
Services
YES
NO
NO
YES
NO
NO
NO
YES
Valuable? Rare?
B
E
Exploited by the
organization?
YES
Competitive
implication
Competitive parity
Temporary competitive
advantage
Competitive
disadvantage
Competitive parity
Competitive
disadvantage
Source: Authors based on Barney’s theory
It has been found that SAS has one temporary competitive advantage in terms of aircrafts; this
happened due their plan of replacing some old and noisy airplanes with just one new model. The two
competitive parity regarding location and business class services show that SAS is not doing the worst
but not the best either. However, brand name and economy class service brought SAS on the position
of competitive disadvantage, which means not only that will not help it to overcome its financial
problems, but also that will contribute even more to their downturn.
4.3 The analysis of SAS’ external environment – a comparison of its networks with those of
Lufthansa, Swiss and Turkish Airlines
Cooperation is a term which is used when companies compete and at the same time cooperate
to achieve their strategic goals (Luo, 2004). First Airline industry put in practice “cooperation” through
Star alliance group. It involves airline companies which compete by increasing the flight network,
service quality and etc. In the same time they cooperate in order to enhance their competitive
advantages. Code-sharing is one way for the companies to cooperate (Gary L. Lilien, 2012). For
54
example, SAS, Lufthansa, Turkish airlines and Singapore airlines are all member in Star alliance
group, they all have connections between each other.
Figure 13
Source: Authors
On first place, Scandinavian airlines and Singapore airlines expand their agreement so they can
cover more destinations in Europe, Southeast Asia, Australia and New Zealand. “This code-share
expansion is an important step in the deepening of our cooperation with SAS. We are pleased to be able
to offer our customers greater access to destinations in Scandinavia through our partnership with SAS,”
said SIA Acting Senior Vice President Marketing Planning, Ms. Lee Wen Fen. SIA and SAS have been
code-sharing since December 2010, initially encompassing SIA adding its code to SAS-operated flights
beyond Copenhagen to Helsinki, Oslo and Stockholm, and SAS code-sharing on SIA-operated flights
between Copenhagen and Singapore and on selected flights between Singapore and Bangkok.
(www.singaporeair.com).
Another code-sharing between Turkish airlines and SAS exists in the alliance. This agreement
will offer Scandinavian travelers access to six destinations in Turkey. SAS customers will be able to
go to Istanbul from Copenhagen, Oslo, Stockholm, Gothenburg, Helsinki, Aalborg and Billund and
further on to Ankara, Antalya, Bodrum, Dalaman and Izmir. Moreover, Turkish airlines will be present
in 20 destinations in Scandinavia and Finland.
“We are very pleased to announce this code-share agreement with Turkish Airlines. Both
tourism and trade between Scandinavia and Turkey have increased with double digit figures the last
55
years, and we are happy to be able to offer our customers flights to six destinations in Turkey”, says
Joakim Landholm, EVP Commercial at SAS (www.news.decision.com).
In the same time, SAS has a relation with Lufthansa and Lufthansa has wit Singapore airlines,
even in 2004 they expand their code-sharing agreement (www.asatraveltips.com)
This is an example of the first structure of Hakansson and Ford when all of the actors have
relationships between each other and they think that it worth to work together.
Figure 14 - Relationship between three actors
Source: Ibid, p. 1020
In the second model some of the partners do not cooperate because it brings them more costs
than profits.
Figure 15 - Relationship between two pair of actor
Source: Ibid, p. 1021
An example for this structure is the relationship between Lufthansa and Turkish airlines, which
will end up their agreement in March 2014.
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Moreover, Lufthansa and Turkish airlines are good example for the first paradox of Hakansson
and Ford which claims: A company‘s relationships are basis of its current operations and development,
and at the same time these relationships restrict that development.
In theory, members of an airline alliance should support and help each other. But in reality, the
truth can be very different. As members of Star Alliance group both airline companies have a
codeshare agreement, but Lufthansa has announced that it has decided to end it. The reason for that is
decrease in demand of codeshare between Lufthansa and Turkish Airlines and structural costs.
Customers of Lufthansa prefer to travel with Turkish airlines rather than with them. There are a couple
of reasons for that choice. First, Turkish Airlines offer more frequency flights and more destinations.
Second, they serve many other cities in Germany, not only Frankfurt and Munich. Moreover, Turkish
airlines offer flights from different hubs to German cities, while Lufthansa operating flights to Turkey
from Frankfurt and Munich hubs (Aviation, 2013).
Figure 16 - Turkish Airlines route networks between Germany-Turkey
Source: asianaviationgossip.blogspot.dk
Figure 17 - Lufthansa route networks between Germany-Turkey
Source: asianaviationgossip.blogspot.dk
The main reason why people prefer to travel with Turkish airlines is because they offer cheaper
price of the tickets (Turkish Airlines- €128 and Lufthansa €168) – (Aviation, 2013).
57
“Code-share deals are arranged for the parties involved to achieve a win-win situation. These deals are
in favor of both sides” (News, 2013). If there is no profit for one of the partners then some changes
should be taken. Therefore, Lufthansa wants to end up the agreement with Turkish airlines.
The second paradox defined by Hakansson and co-authors states – “It is equally valid to say
that a company defines its relationships or that a company is defined by those relationships.”
The relations between Lufthansa – Turkish Airlines, and Lufthansa – Air China can be traced as
an applicable example in this situation. The news that appeared about the relationship between
Lufthansa and Turkish Airlines (www.centreforaviation.com) show obviously that the strong growth of
Turkish Airlines made the company competitive also in Germany and created imbalance in the
relationship between the two carriers. The reasons of that “break-up” between Lufthansa and Turkish
airlines were highlighted in the part with the first paradox. Due to these reasons, the advantage of
having Turkish Airlines as a partner has become more a disadvantage for Lufthansa. This is why
Lufthansa decided to change its position in its existing network by changing the combination of its
existing relationships. Since Lufthansa already had a code-sharing agreement with Air China and in
addition they were in the same alliance, it was an easier move for Lufthansa to broaden its Asia-bound
traffic through a joint venture with its existing relationship (www.centreforaviation.com).
Another reason for such a smooth decision towards a joint venture is that Lufthansa has an
experience of commercial joint ventures with a lot of other carriers which brings a big part of the
airline’s passenger carrying capacity for Lufthansa. These parameters defined as ASK (available seat
kilometers), can be seen in the graph below. This is how Lufthansa’s position, defined by its
relationships in the existing network, was changed to a better one within the network. It was possible
by defining a new strategy and position through a different combination of relations in its network.
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Figure 18
Source: www.centreforaviation.com
As for the third paradox, the authors of the project did not find any information regarding the
dominance in the network of some airline.
59
CHAPTER 5 – IDENTIFICATION OF SAS’ CHALLENGES, RISKS AND OPPORTUNITIES
Existing in business world today is equal to facing with different types of risks, as well as
challenges and opportunities. Each situation is determined by environment and changes in the focal
industry. For instance, risk in business refers to the possibility of not satisfying profit or even
significant loss, due to uncertainties (www.financial dictionary.com). At the same time challenges in
airline industry represents very wide term which comprehending from managing the fuel to the
implementing the growth. Nowadays, opportunities can be explained as exploitable set of
circumstances with uncertain outcome, requiring commitment of resources and involving exposure to
risk (www. business dictionary.com). Increasing and growth in any area of business implied avoiding
of risk and converting the challenges into opportunities.
5.1 Introducing with SAS' risks
Airlines' profitability is closely tied to economic growth and trade. Now, it is industry with a
very dynamic process of developing and changing. To meet the requirements of their increasingly
discerning customers, some airlines have to invest heavily in the quality of service that they offer, both
on the ground and in the air. Subsequently, airlines have had to recognize the need for radical change to
ensure their survival and prosperity. Those fundamental changes possess certain degree of risk. In
Scandinavian Airlines risks are recognized as market, operational and financial (SAS annual report
2012). Market risks are constituted from demand, traffic scope, competition, price and capacity
changes. Regarding to demand, in recent period it is led by economic crisis. As is previously
mentioned, it is strongly related with economic situation. Since SAS is mainly resided in North
European area, which is not affected by crisis strongly as other parts of globe, it can be proved as an
advantage. At the same time, it means that their customers are not deeply influenced with the present
circumstances, and significant demand still exists. Concerning the traffic scope, for a long period SAS
is under pressure because of competing with the regional and traditional airline companies. Lately,
these companies are oriented on the leisure-traveling passengers which are preceding a very high
percentage in total number of passengers in the recent years. In addition, well-capitalized competitors,
primarily from the Middle East, have aggressively advanced their positions (Ibid, p. 4). The pressure is
even bigger due to existing low-cost carriers. Since globalization has led to an increased necessity for
fast and affordable world-wide passenger transport, air travel is not the privilege for upper classes, as it
used to be. As a result of changes in way of life and present circumstances, passengers are choosing
lower- prices flights to travel, for instance, on long-weekend holidays, which represent a certain trend
nowadays. As for the prices, in recent period passengers are showing increased price sensitivity.
60
According to SAS annual report (2012), company has been faced with declined unit cost for
4%, which represents significant success, but at the same time this cost per unit not included jet fuel as
an important item. Moreover, it disables establishing lower prices, in order to attract customers because
of expected increasing in the fuel price. According to the independent source, Flight-Stats, for the third
time SAS is named as the most punctual airline company in Europe (www.flightstats.com).
Congruently to that, in the previous year company's airplanes transported 21, 7 millions of travelers,
during the 781 daily flights to 101 destinations. (SAS annual report 2012) In order to accomplish that,
company had to possess a huge capacity. Moreover, the company launched 38 new routes, and at the
same time signed a joint-venture contract with Singapore Airlines. All these steps are attempted with
the aim to achieve a company's goal. Even they are displaying a certain level of risk they need to be
fulfilled to improve company's sustainability in the industry. The operational complexities inherentin
airline business, together with the highly regulated and commercially competitive environment of the
airline industry, leave airlines exposed to a number of risks. Considering the operational risk, following
issues needs to be deliberated: connections and relations between employees and company, regulation
of airline industry through expenses driven by policy makers and governments, tie with the keysuppliers and labor market. As for the connections and relations in between employees and company,
SAS' management constantly underlines the dimension of communication and collaboration among
employees. In company’s future strategy established in 2011, named “4 Excellence”, significant part is
devoted on realizing the full potential of employees through strong leadership and co-operation on
shared goals. (SAS’ annual report 2011). There are various expenses and cost airline company needs to
cover for the purposes of participating in air traffic. Majority of them are driven by decisions of
governments and policy makers. Hence, airlines are obligated to pay the fees for using infrastructures
such as access to airport or air-traffic control. In the recent years, user fees increased approximately
3.5% and it is expected to continue with growth in future period as a result of governments’ effort
toward preventing the abuse of dominant position in airline industry (Ibid, p. 33). Financial risk is
fundamental for successful entrepreneurship as well. In airline industry, particularly in SAS is
consisted from: liquidity risk, risk of increasing in fuel prices, interest rates and exchange rates. Since
the scope of business in airline industry is not equal during the year, it can constitute a significant
challenge within the cash flow for the company. To overcome uncertainty in SAS agreed with the
certain amount to be prepared. Subsequently, price of fuel represents one of the biggest financial risks
that SAS has to face with. Since jet fuel comprises almost 20 % of company’s operating cost, and
knowing the fact that in the previous period has been increased almost 40 % per year, it represents an
issue with the highest degree of perceived risk (Ibid, p. 36).
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Thereafter, risk in changing of interest rates and exchange rates need to be evaluated. SAS is
not debt free company and in it financial report interest rate is significant item. At the same time,
owing to turbulence in macroeconomic environment, interest and exchange rates are submissive to
those variations.
5.2 Introducing with SAS’ challenges
Unit costs
Unit costs are combination of different types of costs. If authors want to understand the
expenses and costs, firstly it is essential to find out their drivers. The airplanes need fuel so they can
transport people and goods; therefore fuel is crucial cost driver (Doganis 2010). Fuel prices are very
sensitive to the economic situation. Within the last years its price was highly increased (Doganis 2010).
Fuel expenses depend on fleet structure, route network, location specific requirements (Doganis 2010)
(Holloway 2008). In addition, the fuel price depends on seasonal flights (Doganis 2010). Another
important driver is the airport charges. They are connected with the arrivals and departures of every
airplane and the fees that the company is needed to pay (Holloway 2008). Airport charges are related
with the frequency of the flights, that is why long-haul flights will be cheaper than the short-haul
flights because there are just one or two long-haul flights per day (Doganis 2010). Fleet structure will
be developed later, but most of the expenses are related somehow to the fleet structure, for example
fuel costs, airport charges. Moreover, labor expenses are tied to the fleet structure too, because pilots
are able to work and fly only with one type of aircraft. The reason for this is that airplanes models are
different between each other (Doganis 2010). Finally employee expenses are one of the most
important. They are more controllable.
Unit costs of SAS
After decomposed the expenses of SAS it is obvious that employee and fuel costs are the two
major costs and they compose half of their expenses (CAPA 2013). Scandinavian airlines face serious
problems in the last decade, they lose big amount of money every year. In the last four years, SAS got
negative outcome. Cutting costs became a crucial part of saving the company. One big challenge for
Scandinavian airlines is that they have one of the highest unit costs (cost per available seat per
kilometer) in Europe. SAS’ unit cost is SKR 0.86 and on the other side Norwegian airline’s, their
biggest competitor, unit cost is much lower – NKR 0.45. These costs influence the price of the tickets.
For example, a ticket from Oslo to Stockholm will cost 935 NKR if a customer orders it through
Norwegian airlines and 1500 NKR if it is through SAS (Parker 2013). One third of the company’s
revenue goes for employees.
62
Figure 19
Sources: Nomura; HSBC (Parker 2013)
Figure 20
Source: CAPA analysis of company financial statements
As it is obvious from the table above Scandinavian airlines pays the highest employee costs
than any other European airline.
63
LCC
Low cost airlines have a big advantage, comparing with other network airlines, and this is the
price. In last decades low-cost airlines expand in aggressive way their market share in Europe.
However, the cost advantages of low-cost airlines appear mainly in relation to short-haul routes
(Francis et al., 2007). SAS is high cost company but it competes with low-cost companies, for example
Norwegian airlines, Ryanair, EasyJet. These days, Norwegian airlines are their main competitor. As
Richard Gustafson (CEO of SAS) said “We can’t have one competitor that we compete with on 60 per
cent of our routes if we are not competitive.” The situation for Scandinavian airlines is even worse
because they focus mainly on short-haul operations in Europe. Generally, the high cost airline
companies, such as Lufthansa and Air France-KLM prefer long-haul operations, because these routes
bring more revenue than short-haul flights due to first class passengers and business customers (Parker
2013). Moreover, in the past decade British Airlines left their short-haul flights and focused on the
long-haul flights as more profitable. The reason for that was the entrance of EasyJet and Ryanair,
which are low-cost carriers and BA started to lose passengers (Starmer-Smith 2010). Contrarily,
despite the bad financial situation in SAS, the company does not plan to stop any routes even if they
are not so profitable. Contrarily, Scandinavian airlines continue opening new routes (Norwegian
closing the gap on SAS; new long-haul flights increase pressure on Scandinavia’s biggest airline 2013).
Figure 21
Sources: Nomura; HSBC (Parker 2013)
Geography
64
Scandinavian airlines are located in North Europe. This part of the continent lacks of
population, which makes it harder to support long-haul network. Scandinavian airline is not that
flexible and primarily focus on its domestic market. Most of its international flights are mainly in
Western Europe, connecting Scandinavia with other Europe countries. Long-haul operations present
less than 3% of its seats capacity (CAPA 2013). According to SAS’s CEO, Richard Gustafson the
company needs to “focus on our own network, destinations and feeder routes” and “50% of passengers
have a final destination beyond New York” so Scandinavian airlines could use Star Alliance partners
and offer different far destinations for its travelers (find resource).
SAS international VS domestic capacity
(Share of seats)
SAS international capacity by region
(Share of seats)
Source: CAPA – Centre for Aviation & Innovata
Ownership structure
Scandinavian airlines are established in three countries –Denmark, Sweden and Norway. The
company is half owned by the governments of these three countries. The biggest shareholder is the
Swedish government with 21.4%, and then Denmark and Norway have 14.3 % of its shares (CAPA
2013). The other half of SAS is owned by private shareholders, mainly from Sweden (50 percent)
(Services 2013). The ownership structure of SAS is very complex, which can be accepted as a big
challenge. The three countries have to control the employees, managers and other members between
each other. The result is high level of transactional costs and it is even harder for them to maximize its
business in the current situation. Another negative aspect of this structure is that when SAS is making
decisions they need the approval of all three governments, which makes the procedure slow and more
difficult. One recent example is that SAS needed to negotiate with eight unions for a new credit facility
(Parker 2013).
65
Fleet structure
Fleet structure is a term used when describing different types and number of airplanes that a
company is using (Kilpi 2007). The variance in airplane type influences the business model and route
network that Airline Company chooses (Kilpi 2007). For example, aircrafts for short-haul flights and
for long-haul flights are designed in different way, to carry big amount of fuel or to be able to land on
smaller.
Generally, SAS owns 10 types of airplanes divided on four categories: aircrafts for short- haul,
long-haul, regional jets and turboprops (Services 2013). The number of airplanes that they posse
together with Blue1 is 145 (11 long-haul aircraft, 122 short-haul aircraft, and 12 regional jets) with
average age 12.6 years old for Scandinavian airlines and 12.2 for Blue1. Most of the airplanes are
bought before low-cost companies get in the market. Today Scandinavian airlines are trying to
homogenize its fleet and to lower its unit costs in this way (Services 2013).
5.3 Introducing with SAS’ opportunities
Opportunities in business have a very heterogeneous meaning. They can encompass different
level in commitment of resources with the objective of increasing efficiency and effectiveness.
Reviewing of SAS’ opportunities means considering the circumstances which can adduct to certain
improvements. Considering advances, in SAS there are plans about investing in new aircraft, starting
with 2016. (SAS Annual Report 2012) In addition, mentioned new aircrafts possess very similar engine
with those company already own. That can ensure easy and lower cost maintaining. At the same time
since engines are new they will ensure savings in fuel consumption as well as reducing of noise and
meet the standards required by the regulatory agencies. Moreover, in SAS recognized necessity for IT
upgrading in order to improve their business activity. Subsequently, new IT platform has been built
which enables lower costs and simplifications of operations and maintenance (Ibid). In airline industry
there is existing wide expanded trend of joining the alliances or joint ventures as types of business
cooperation among companies. For airlines that type of cooperation represent significant opportunity.
In other words it is a possibility to increase passenger volumes, to approach to those resources that
company does not possess and to expand the area of performing. Regarding to those recognized
advantages, SAS became a member of the world’s first and largest alliances- Star Alliance, since 1997.
Alliances between airlines on international markets have become a dominant feature of the airline
industry. Many customers demand a ‘from anywhere to anywhere’ service, which is impossible for
66
one airline to supply efficiently, and there are significant economies of density that can be achieved by
merging networks (www.iata.org).
Regarding to the facts from SAS annual reports it is evident company is primarily regional
oriented. Almost 70% of traffic is consisted from intra Scandinavian and European routes.
As for the SAS expanding in area of serving can be significant opportunity. At the same time
focusing on long-haul flights presents one of them. It brings lower costs due to lower taxes needs to be
paid for using the airport, and at the same time tickets for long-haul flights are more expensive. The
main issue is in finding the frequent route. Subsequently, orienting on the leisure-travelers, or, so called
“sun-seekers” in one of the possibilities. By virtue of high-living standard in Scandinavian countries,
significant number of citizens decides to spend winter holidays in the Southern countries, focusing on
mentioned categories of travelers can represent appreciable circumstance. Significant instance for SAS
is in increasing cost-efficiency and achieving higher levels of loyalty among both companies and
travelers, as it is indicated in company’s future strategy known as 4 Excellence. As for the cost
efficiency, according to latest annual report (2012), in the last year those costs have declined 4%. Even
though in the airline industry there are certain costs without any control by airlines over situation, SAS
still needs to emphasize the restructure of costs as a way of overcoming the challenges and converting
them into opportunities.
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CONCLUSIONS
The project has subsequently deliberated present situation in Scandinavian Airlines as well as
circumstances in airline industry and all challenges company’s activities have to deal with. The goal of
the project was to evaluate SAS’ resources, compare them with few Star alliance members and identify
whether these resources offer SAS a competitive advantage as well as point out recognized
opportunities as steps for overcoming difficulties in SAS’ activities.
In the first and second chapters, after identification of the problem statement and introduction
with the object to observe, case study method is determined as the most appropriate technique for
methodology structure of the project. Moreover, research design components and phases in case study
design are identified. The third chapter emphasized two main theories as fundamental for the project:
inter-organizational network theory and resource-based view.
In addition, different perspectives and authors’ visions are examined in order to determine the
most appropriate and applicable for the focal company. The fourth chapter evaluated SAS’ position in
Scandinavian market through the comparison with three network member airlines such as Lufthansa,
Swiss and Turkish Airline. The tangible (geographic location and aircrafts) and intangible (brand name
and services) recourses are evaluated of each airline company where SAS is found out to be in the
worst position. After that, VRIO framework is applied followed by the conclusion that SAS has only
one temporary competitive advantage in terms of aircrafts. The two competitive parity regarding
location and business class services showed that SAS is taking the middle position. However, brand
name and economy class service establish SAS the competitive disadvantage which means it will not
help to overcome financial problems but even contribute more to the losses.
Finally, authors ascertained the significant of control in airline industry. Subsequently, ICAO
and IATA are recognized as the most powerful policy-makers in industry. Thereafter, fifth chapter is
discussed about SAS’ challenges, risks and opportunities in airline industry.
Demand, price and capacity changes represent a several risks SAS has to face with. At the same
time investing in new aircrafts which will lower the maintenance and fuel costs, IT upgrading and more
international routes are named as the current opportunities for SAS future business activities.
68
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